ING’s Chris Turner notes that the US dollar (USD) briefly weakened on the news that the Strait of Hormuz was fully open, which puts the US dollar index (DXY) at around 97.50/98.00 and EUR/USD at just over 1.18 if the crisis is averted. ING economists expect the dollar to remain near these levels this quarter, with DXY likely to trade around 98.00/98.50 as Federal Reserve (Fed) hopes for monetary easing fade.
Fed Expectations and Conflict Drive DXY
“Friday’s headline by Iranian authorities that the Strait of Hormuz is ‘completely open’ gave us a vision of where the dollar will be able to be traded after the crisis ends. This corresponds to the area around 97.50/98.00 in DXY and just over 1.18 in EUR/USD.
“Peace talks are a stop-start affair, focusing attention on when energy flows can fully resume and whether high oil prices will begin to spill over into other areas of the economy. We note another good speech by the Federal Reserve’s Christopher Waller on the Friday before the Fed shutdown. The speech was titled ‘One Temporary Shock After Another.’
“Recall that Waller voted for cuts in January and now emphasizes that the longer energy prices remain high, the greater the risk that the oil shock will increase the tariff shock and de-anchor inflation expectations. For him, the US inflation expectations for a period of 5-10 years, obtained as a result of the 5Y5Y inflation swap, seem important.”
“Any move towards the 2.70/2.80% area that is seen in early 2022 could prove to be the end of any hopes for the Fed easing monetary policy this year.”
“We are not in favor of an immediate return to the mild dollar decline that has characterized the start of the year, and we suspect DXY may trade in ranges near 98.00/98.50.”
(This article was created with the lend a hand of an artificial intelligence tool and has been reviewed by an editor.)
