ING: The USD - FJElite
The dollar has opened the week on a strong note, catching up with a combination of supportive domestic and external developments. Domestically, last week's hotter-than- expected CPI print has all but sealed a Federal Reserve rate hike on Wednesday. Consensus is nearly unanimous, and markets are pricing 22bp. That may suggest limited USD upside on the day, but the currency still has room to catch up with higher front-end rates, while the Fed may retain a hawkish tone given the bond market’s demand for policy credibility and recent rise in energy prices.
Externally, oil prices are rising again today after Saudi Arabia shut the East-West pipeline following drone attacks from Iraq. The pipeline is a critical alternative to the Strait of Hormuz for roughly 7m bbl/day of exports. At the same time, Oman-led talks with Iran and other Gulf states on a temporary shipping route through the Strait have been postponed. Against that backdrop, risk sentiment should remain fragile, with calls from prominent tech figures to slow AI development adding pressure to already dwindling equities.
We continue to favour a moderately stronger dollar from here. A message of monetary policy rigour by the Fed on Wednesday can help slowly rebuild the positive USD-Treasury yield correlation, allowing the greenback to function more efficiently as a safe haven. A return to the 99.50-100.0 in DXY remains a tangible possibility in our view, and fully in line with current drivers.
One risk to that view is US President Donald Trump's pledge to send $5k to every American should Republicans win Congress in the midterms. Markets remain sceptical about the proposal, both because of the legislative hurdles and because Democrats maintain a comfortable House lead in polls and prediction markets. Even so, the pledge may signal a willingness to deploy fiscal measures ahead of the vote despite persistent concerns about debt sustainability. Any indication that similar measures are being taken seriously could trigger a rise in the USD risk premium.