MUFG head of research Derek Halpenny highlights that the two-week ceasefire between the US, Israel and Iran has sharply weakened the US dollar as risk sentiment improves and Brent crude falls. He argues that such an outcome is clearly bearish for the dollar, increases the divergence of monetary policy from Europe and could undermine confidence in US assets, which could result in further short-term losses for the dollar if negotiations progress.

The ceasefire changes the risk and prospects of the dollar

“So there are a lot of uncertainties that will remain, but having said that, this is obviously a step in the right direction and we think it significantly reduces, at least in the short term, the risk of significant de-risking and therefore strengthening of the dollar.”

“This result is a clear bearish result for the US dollar.”

“The US dollar has performed below our expectations throughout the conflict given the scale of energy price increases, and under these circumstances, a ceasefire and possible settlement will potentially result in further losses in the short term.”

“However, uncertainty is high and we expect markets to remain very sensitive to emerging information on progress in the upcoming negotiations.”

“A reversal of trading at the G10 on this positive news would mean that in the coming days the best-performing companies throughout the conflict would be the best performers – which would point to a strong performance of SEK and NZD at the expense of NOK and GBP – two of the best performing countries since the beginning of the conflict.”

(This article was created with the aid of an artificial intelligence tool and has been reviewed by an editor.)