MUFG’s Senior Currency Analyst Lee Hardman notes the Dollar has strengthened, with the Dollar Index back above 100.00, as Middle East energy infrastructure attacks lift Brent above USD115 and raise global supply concerns. He highlights that reduced Fed rate cut expectations, tied to higher energy-driven inflation risks and Powell’s cautious stance, further support the US Dollar over coming months.

Energy shock and Fed stance back Dollar

"The US dollar has continued to strengthen overnight resulting in the dollar index rising back above 100.00. The US dollar’s renewed upward momentum was triggered by yesterday’s military strikes on energy sites in the Middle East which has reinforced market concerns over greater supply disruption. In response the price of Brent has risen to a high overnight of USD115.10/barrel."

"The latest developments have increased the risk of a bigger and more prolonged energy price shock alongside the ongoing closure on the Strait of Hormuz. The attacks on energy sites even drew criticism from President Trump who posted on social media that the US was not involved in the South Pars attack, and that Israel should refrain from further strikes on the site. He also warned Iran that any further attacks on Qatar’s LNG facilities would prompt the US to “massively blow up the entirety” of the South Pars field."

"Overall, we continue to judge that risks remain heavily tilted to the upside for energy prices and the US dollar given the unprecedented hit to global energy supply."

"The comments are consistent with the ongoing hawkish repricing in the US rate market which has moved to scale back Fed rate cut expectations. There are now only around 11bps of cuts priced in by year end to reflect upside risks to inflation from higher energy prices. For now at least the Fed is still sticking to plans for one further cut this year."

"Overall, the scaling back of Fed rate cut expectations is another supportive factor for the US dollar triggered by the Middle East conflict."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)