US Dollar: Geopolitics and inflation risks support Dollar – MUFG

MUFG’s Lee Hardman notes the US Dollar (USD) has gained modestly as renewed US–Iran tensions lift Brent Oil back to USD80, with markets rebuilding a geopolitical risk premium. He highlights that higher Oil prices could reinforce upside US inflation risks just as the Fed considers further rate hikes, with June Consumer Price Index (CPI) and Chair Warsh’s semi-annual testimony seen as key for Dollar direction.

Geopolitics, Oil and Fed inflation risks

"The US dollar has strengthened modestly at the start of this week encouraged by renewed military tensions between the US and Iran."

"The spill-over effects into the foreign exchange market remain relatively modest so far."

"A significantly higher price of oil has the potential to be a more powerful bullish catalyst for the US dollar now that the Fed has indicated recently that it is considering raising rates in response to upside inflation risks."

"However, it has the potential to exert a more meaningful influence on inflation and Fed policy going forward.

"Another benign core reading, alongside easing energy inflation, would likely encourage market participants to pare back expectations for further Fed rate hikes, putting a dampener on US dollar strength in the week ahead.""