Ask most investors about the currency implications of a war in the Middle East and a consequent surge in energy prices and Steven Barrow, Head of Standard Bank G10 Strategy dares say that most would have suggested three things. The first is strength in ‘safe' currencies like the dollar and Swiss franc, and perhaps the euro. The second is a probable surge in the yen as yen-funded carry trades unwind. While the third would be some strength for currencies that have significant energy resources, like Canada and Australia, and possible weakness in those that rely on imported energy for the bulk of their needs, like the euro or the pound.

However, when we look at it, few of these things have happened. Safe currencies have not been particularly safe. And if we expand the ‘currency' universe to include gold, then the safe-asset theory goes right out of the window, as it has been one of the weakest performers.

With respect to the second prediction of yen-funded carry trade unwinding, it seems that this too is a false prophecy, as the yen has weakened, not strengthened. Only the last prediction, that countries with strong energy resources will see currency appreciation, has come close to being fulfilled, as the Australian dollar and Canadian dollar are the two best G10 performers since the war started in Iran, although, even here, not everything has gone to plan, with the Norwegian krone hardly shining. So, what are we to make of all this? That the FX market is slow to catch on and that currencies will return to a more customary trajectory in time? Or that this is yet another case where history has only been a good guide to the past; not the present and perhaps not the future?

Steven Barrow thinks it is the second. First up, it is not at all clear to us that the dollar is the key safe asset. This does not just reflect what's happened in the last thirteen days, but what has come before. Previous bouts of major market tension have not seen the US dollar surge in the way it has before, even including the pandemic.

And then, of course, we had the dollar slump the last time there was financial market pandemonium during President Trump's tariff tantrum last spring. If major market-moving events such as this – and the current war—do not provoke some sort of rush for the dollar as they had in the past, then it is probably fair to say that those running with short-dollar positions over the long haul can sleep  a lot more soundly in their bed. Yes, the dollar might experience a brief rally when disaster first strikes the world, but it looks as if these offer opportunities to sell the dollar, not buy it. That's the dollar, what about the franc?

Steven Barrow said it has risen against the key currency, the euro, but not significantly. The threat of SNB intervention could be the key here although, more likely, it is simply the fact that this present bout of geopolitical uncertainty and financial asset weakness has not created substantial demand for any supposed safe asset.

We can point to the weakness in gold prices and treasuries in support of this. The same argument could be a reason why there has been no unwinding of yen-funded carry trades through this crisis. It has long been argued that these carry trades are huge and could lead to material strength in the yen and weakness in higher-yielding currencies if unwound.

“Our suspicion here is that the debasement trade, which seems to be dominating dollar sentiment, is also casting a pall over the yen and this offsets any support for the yen from carry-trade unwinding. If that's right the yen seems likely to stay weak. And finally, on the strength of commodity-rich currencies, like the aussie. This just seems to be the flip side of the safe asset argument. If safe assets are no longer in hefty demand during risk-off events investors can be more discerning in the currencies they want to hold and, right now, commodity-rich currencies are the best and likely to stay that way for some time to come”, said Steven Barrow.