The conflict between Israel and Iran is not having the expected effects. While the price of oil has risen, it hasn’t gone beyond its level at the beginning of the year. The dollar has not served as a safe haven. Generally, in the event of a shock, investors rush to the greenback, considering it a risk-free asset.
There was also no significant impact on long-term interest rates in either the United States or Europe.
In fact, this looks like a minor regional shock, while the way the conflict is resolved will have a significant impact. And investors, unsure of which direction it will take, are in a wait-and-see position.

Two remarks

• The dollar is depreciating, more affected by Donald Trump’s potential announcements on customs tariffs that will be implemented in July than by the war. The former would have more persistent effects!!!!
• The price of oil has not soared. An article in the FT this weekend suggested that Saudi Arabia’s announced rapid increase in oil production for June may have something to do with this overly rapid decline. In such a situation, the risk of a regional conflagration would be reduced.

What would happen in the event of a more severe shock: two dimensions

• The first dimension would be a sharp and sustained rise in the price of oil. The effect would quickly become inflationary. Generally, central banks do not react. They do not know what the price of oil will be in 3 or 6 months. So taking a position on a rise in the price of oil means taking the risk of being on the wrong track in 3 or 6 months if the price plummets. In 2022, the Fed raised its rates on the issue of shortages, particularly in semiconductors. The ECB only intervened when the energy crisis took a persistent turn with the combined rise in gas and electricity prices.
  However, this would be a good reason for the Fed not to rush into lowering interest rates.
• The other dimension is that of the lender of last resort. In the event of a negative shock, the Fed generally reactivates dollar swap lines so that no one runs out of liquidity. Transfers of dollars, a safe haven currency, are then considerable and the shock is muffled. The coordination and complementarity of central banks thus played their role.
  But what if US assets are no longer perceived as risk-free? What if the dollar is no longer a safe haven currency? The crisis following the shock would be volatile and terribly unpredictable. The impact would be brutal and persistent.
  Furthermore, could the Fed assume this role of lender of last resort in the face of pressure from the White House and with the world now less cooperative? What game would the ECB and the Bank of China play? The cards would be reshuffled, with new rules to be invented and written.