US Dollar: Yield support offsets truce uncertainty – MUFG

MUFG’s Derek Halpenny notes that optimism over a potential US–Iran peace deal initially pushed the Dollar lower alongside a sharp drop in Brent crude, but subsequent US strikes have revived uncertainty. He highlights that US yields and a more inflation-focused Federal Reserve stance should keep supporting the Dollar, while EUR/USD and high beta currencies like SEK and AUD remain vulnerable to setbacks in peace negotiations and geopolitical risks.

Yield support versus geopolitical swings

"However, strikes by the US in the region overnight has undermined this optimism and created elevated uncertainty."

"Marco Rubio has played down the US attacks stating that the talks would “take a few days” while President Trump posted that the talks were “proceeding nicely”."

"That would suggest, especially after the US strikes, that there is a risk of a further unwind of the move in markets yesterday."

"US yields look set to continue to provide support for the dollar with Fed officials more aligned with focusing on inflation risks."

"Fed Governor Waller’s speech last week underlined the shift with a signal of a potential rate hike if “inflation does not abate soon”."

"We do not believe a rate hike is coming this year and indeed if a credible peace deal is achieved a rate cut this year is still feasible."

"But until both sides formally announce a deal, investors will likely trade cautiously given the inflationary pressures that are building."

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