Elias Haddad of Brown Brothers Harriman (BBH) sees an improvement in risk sentiment as concerns over Iran subside, oil weakens, U.S. stocks strengthen and yields return. Haddad argues that the US Dollar Index (DXY) could breach the 96.00-100.00 range, supported by US interest rate differentials and stable US economic growth, while European Central Bank (ECB) and Bank of England (BoE) expectations are less favorable for the euro (EUR) and the pound (GBP).

Dollar supported by exchange rate spreads

“Improving sentiment related to the Iran war is driving markets. Oil prices are on the defensive, US stock futures are at record highs and long-term bond yields continue to see recent overshoots. USD is slightly lower against most major currencies.”

“In our view, the dollar index (DXY) is poised to break above the upper end of the near-yearly range of 96.00-100.00, in line with interest rate differentials between the U.S. and other major economies. Moreover, expectations of a U.S. interest rate hike are positive for the USD as they reflect the resilient U.S. growth environment and sticky inflation.”

“On the other hand, expectations of ECB or BOE interest rate increases are less favorable for EUR and GBP as they reflect a stagflationary mix of high inflation and weak growth.”

“Additionally, liquidity and leverage issues in the non-bank financial intermediation sector may increase market tensions.”

“The ECB’s May financial stability review does not change the scale of expectations regarding interest rates. The ECB warned that prolonged geopolitical tensions, combined with growing concerns about the sustainability of public finances, increase risks to financial stability.”

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