ING’s Chris Turner argues it is premature to expect a sustained Dollar sell-off as Middle East tensions keep energy prices elevated and support safe-haven demand. With the US money market curve pricing out Federal Reserve easing for 2026 and inflation still above target, Turner expects DXY to remain supported in a 99.00-100.00 range this week.

Dollar supported by conflict and Fed stance

"Risk assets are bouncing in Europe on reports that the US has submitted a 15-point peace plan to Iran. The suggestions are that ceasefire talks could potentially start in Islamabad on Thursday. We are not geopolitical experts, but we would have thought Iran would have maximum leverage of high energy prices going into any negotiation."

"Thus, it is probably too early to expect any big drop in energy prices or a much softer dollar this week. In effect, the US and Israel have military leverage, but Iran has clearly shown it has the economic leverage. The longer the Strait of Hormuz remains shut, the greater the impact on the global economy, where fuel rationing is already coming into effect in some countries."

"The US money market curve has now priced out any easing by the Fed this year, and the message coming from Fed speakers is one of patience. The near-term inflation profile will not give the Fed any confidence that CPI is on its way to the Fed's 2% target, and thus the easing cycle is temporarily suspended. It is hard to rule out the market starting to price in Fed hikes as long as the US jobs market does not deteriorate markedly."

"We think it is too early to expect another major leg lower in the dollar and can see DXY staying bid in a 99.00-100.00 range this week. Investors are still likely overweight on equities, especially in Europe and emerging markets, and are still positioned for a quick resolution in this conflict."

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