ORLANDO, Florida, June 16 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Investor sentiment and risk appetite rebounded sharply on

Monday as fears around the Israel-Iran conflict subsided,

shifting the spotlight away from geopolitical risk and back

towards this week's raft of central bank policy meetings.

In my column today I look at why the dollar's status as a

safe-haven asset in times of heightened geopolitical uncertainty

may be fading in a world of 'de-dollarization'. More on that

below, but first, a roundup of the main market moves.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. Iranian state broadcaster hit as Iran urges Trump

to

make Israel halt war

2. Seeking unity, G7 meets amid escalating Ukraine,

Middle

East conflicts

3. Tariff 'stacking' adds another headache for U.S.

importers

4. Investors shun long-term U.S. bonds as hopes for

aggressive Fed rate cuts fade

5. Reuters interview with ECB Vice President de

Guindos

Today's Key Market Moves

* Oil slides as much as 4% at one stage on Monday

but

Brent futures settle only 1.35% lower at $73.23/bbl, suggesting

a chunky risk premium remains in the price. Oil spiked 7% on

Friday.

* Wall Street rebounds strongly, with the S&P 500

back

above 6000 points and the Nasdaq gaining 1.4%.

* Nvidia shares rise 2% to the highest since January 24,

within

sight of the record peak of $153.13 from earlier that month.

Shares are up almost 70% from the post-'Liberation Day' low.

* U.S. Treasury yields rise and the curve bear steepens

despite a

pretty solid 20-year bond auction. Longer-dated yields up 5 bps.

* Gold gives back Friday's gains, sliding more than

1% to

$3,386/oz. The dollar rises 0.5% against the yen ahead of the

Bank of Japan's rate decision on Tuesday.

Truce hopes spark rebound

Signs of de-escalation between Israel and Iran - or at least

hopes of de-escalation - ensured markets started this week much

more positively than they finished last week. Whether that

optimism is justified remains to be seen but the rebound was

pretty strong, taking Wall Street and world stocks back to

within sight of their recent highs.

It's a very fluid situation, so investors' relief may be

short-lived. Iran has called for U.S. President Donald Trump to

get Israel to halt its attacks, but both countries continue to

fire missiles at each other. Meanwhile, a U.S. official said

Trump will not sign a draft G7 leaders' statement calling for

de-escalation of the conflict.

Optimism that a truce will be reached appears to be stronger

in equity markets than elsewhere. Gold gave back Friday's gains

but not before hitting $3,451 an ounce, a level last reached

when it clocked a record high on April 17, and in volatile trade

oil settled 1.7% lower, having surged more than 7% on Friday.

Perhaps equity investors have it right. The oil price has

less of a bearing on global growth or asset prices than it used

to, and markets have been pretty resilient to Middle East

conflicts in recent years, with selloffs proving to be shallow

and short-lived.

Unless there is a real adverse oil price shock, it will

probably be a similar story this time around, although spiking

inflation would be problematic for central banks.

Economists at Oxford Economics sketch out an extreme

scenario where the closure of the Strait of Hormuz pushes oil up

to $130 a barrel, which could lift U.S. CPI inflation to almost

6%. Oil is nowhere near that yet though.

As Deutsche Bank's Henry Allen notes, perhaps the story of

the year is how resilient stock markets have been in the face of

myriad large shocks - DeepSeek's emergence casting doubt over

U.S. tech valuations; Europe's fiscal regime shift triggering

the biggest daily jump in German yields since 1990; the U.S.

losing its triple-A credit rating; Trump's tariffs and the S&P

500's fifth-biggest two-day fall since World War Two.

And yet here we are, with world stocks at all-time highs.

Aside from geopolitics, the focus for investors this week

will mostly revolve around central banks. The Bank of Japan will

deliver its policy decision on Tuesday, and economists expect it

to hold off from raising rates again due to the uncertainty

around U.S. tariffs.

Later this week we have decisions from Indonesia, Brazil,

Switzerland, Sweden, Norway, Britain and the U.S. Federal

Reserve.

Israel-Iran conflict highlights dollar's tarnished

safe-haven appeal

A dramatic spike in the potential for all-out war between

Israel and Iran would typically be expected to spark an

immediate and strong rally in the U.S. dollar, with investors

seeking the safety and liquidity of the world's reserve

currency.

That didn't happen on Friday.

The dollar's response to Israel's strikes on Iranian nuclear

facilities and military commanders, followed by Tehran's initial

threats and retaliation, was pretty feeble. The dollar index, a

measure of the currency's value against a basket of major peers,

ended the day up only around 0.25%.

To be sure, the dollar fared better than U.S. stocks or

Treasuries, which both fell sharply on Friday. But with oil

surging over 7% and gold up a solid 1.5%, a strong 'flight to

quality' flow would have lifted the dollar more than a quarter

of one percent.

The U.S. currency's move was particularly weak given the

dollar's starting point on Friday. It was at a three-and-a-half

year low, having depreciated 10% year to date, with sentiment

and positioning heavily bearish. Yet a significant geopolitical

shock generated barely a knee-jerk bounce.

For comparison, the dollar rose more than 2% in both the

first week of the 2006 Israel-Lebanon War and in the week

following Israel's invasion of Southern Lebanon last year.

The dollar's weak response to this latest Middle East

conflict supports the narrative that investors are

now reassessing their high exposure to dollars, in light of some

of the unorthodox policies put forward by U.S. President Donald

Trump in recent months.

The dollar was down slightly early on Monday, and gold and

oil were giving back some of Friday's gains too, as markets

regained a foothold at the start of a busy week packed with key

central bank meetings.

PAINED SMILE

The dollar has historically been one of the best hedges

against short-term volatility sparked by geopolitical risk,

behind gold and on a par with oil, according to research

published last year by Joe Seydl, senior markets economist at JP

Morgan Private Bank.

Indeed, a Journal of Monetary Economics paper from last year

stated plainly, "The dollar is a safe-haven currency and

appreciates when global risk goes up," a trend resulting from

the "fundamental asymmetry in a global financial system centered

around the dollar" built up over the course of several decades.

That latter part of that argument hasn't changed.

The dollar accounts for almost 60% of the world's $12

trillion FX reserves, with its nearest rival, the euro,

accounting for around 20%. Almost two-thirds of global debt is

denominated in dollars, and nearly 90% of all FX transactions

around the world have the greenback on one side of the trade.

That means traders, financial institutions, businesses,

consumers and governments still need to be more exposed to

dollars than any other currency, even if they question the

direction of current U.S. policy.

However, the dollar's downside 'structural' risks are

growing, analysts at Westpac noted on Sunday, as concern over

Washington's fiscal health and policy uncertainty erode the

dollar's 'safe-haven identity'. Investors are now looking to

hedge their large dollar exposure more than ever.

If this dampens their instinctive demand for dollars in

periods of sudden geopolitical tension, uncertainty and

volatility, then the so-called 'dollar smile' theory could be

challenged.

This 'smile' is the idea that the dollar appreciates in

periods of financial market stress as well as in 'risk on'

periods of strong global growth and investor optimism, but sags

in between. This idea was first outlined over 20 years ago by

then currency analyst and now hedge fund manager Stephen Jen.

If the Israel-Iran conflict continues to escalate, that

dollar smile could get rather lopsided.

What could move markets tomorrow?

* Israel-Iran conflict

* Bank of Japan decision and guidance

* South Korea trade (May)

* Germany ZEW investor sentiment survey (June)

* U.S. retail sales (May)

* U.S. import prices (May)

* U.S. industrial production (May)

* U.S. 5-year TIPS note auction

* Bank of Canada minutes

* Headlines from G7 summit in Canada

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