Rabobank’s currency strategy team points out that the dollar has recently gained support from safe-haven demand and shifting expectations around Federal Reserve policy. The bank noted that better prospects for a US-Iran peace agreement and the reopening of the Strait of Hormuz might lessen safe-haven inflows into the dollar. Nevertheless, the new Fed Chair, George Warsch, has adopted a more hawkish approach than anticipated, which is helping to sustain the dollar’s strength.
Funding safe assets and Fed repricing
“In recent months, the US dollar has been influenced by both safe-haven capital flows and evolving market expectations concerning Fed policy. These two factors seem to have intersected, particularly with the signing of a memorandum of understanding between the US and Iran coinciding closely with a recent Fed policy meeting. The DXY Dollar Index is up this morning, suggesting that these opposing forces may be positively affecting the dollar.”
“The dollar’s increase at the onset of the Iran war seemed to confirm its status as a safe-haven asset. However, this is debatable. We’ve suggested that the need for liquidity will keep the dollar as a safe-haven choice during periods of significant uncertainty, and the dollar’s decline last spring was largely due to longstanding dynamics with Iran. It’s essentially a “buy America” trend.”
“This week’s favorable developments regarding a potential peace deal and the reopening of the Strait of Hormuz could reduce safe-haven demand, possibly leading to a weaker dollar. But, Warsh’s unexpectedly hawkish comments during yesterday’s Fed meeting have overshadowed dollar bears and boosted bulls, at least for the time being.”
“Looking ahead, the dollar may be at risk if expectations for interest rate hikes diminish. Still, doubts exist about the euro’s capability to re-establish its upward momentum.”
“Rabobank’s primary outlook suggests that interest rates will remain stable this year. Yet, current market trends indicate there’s potential for an increase of about 40 basis points over the next six months.”
