MUFG’s Derek Halpenny notes that the US Dollar’s initial weakness after President Trump extended the pause in attacks on Iran’s energy assets has been short-lived, with DXY only slightly lower. He argues that if risk-off intensifies, especially with Brent crude Oil in a higher range and equities falling, the Dollar should strengthen further in the short term despite a poor longer-term backdrop.

Dollar seen benefiting from risk-off

"The price of Brent crude oil dropped sharply after the announcement yesterday by President Trump that he was extending the pause in attacks on Iran’s energy assets until 8pm EST on 6th April but the drop has by now fully retraced underlining a level of scepticism amongst investors over the prospect of a successful outcome. The US dollar weakness in response to the announcement has also been fleeting with the DXY now around 0.1% weaker from when the announcement was made."

"If we are about to enter a more pronounced period of risk-off with larger equity market falls we would expect the US dollar to extend stronger. In January we saw doubts emerge over the dollar’s safe-haven status and dollar debasement fears saw gold and silver surge. President Trump described the selling of the US dollar in January as “great”."

"We certainly continue to believe the fundamental backdrop for the dollar remains poor and we continue to expect renewed dollar depreciation beyond this period of conflict in the Middle East. But we do not expect that to be on show over the short-term and fully expect the dollar to benefit most if the equity markets take a bigger hit."

"In a more severe scenario of Brent crude oil trading in a range of USD 120-160pbl and equity markets taking a bigger hit, the DXY could advance closer to the 105-level (+7%-8% from pre-conflict level)."

"In a scenario of more intense risk aversion we doubt terms of trade and yield dynamics will play much role in FX direction."

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