Deutsche Bank’s Global Head of FX Research George Saravelos notes that the Iran war has made markets highly correlated to energy, with higher Oil prices and weaker global growth now supporting the Dollar. Asia FX is seen as central to broad Dollar direction and is being hit hardest. Saravelos judges recent developments as Dollar bullish but keeps forecasts unchanged until April due to high uncertainty.

Energy shock underpins Dollar resilience

"Everything became very correlated to energy prices. As the conflict drags on, we have to ask how it affects our bigger picture views and dollar forecasts."

"The longer the supertankers can't sail through the Strait of Hormuz, the higher energy prices will spike and the bigger the hit to global growth, especially Asia. Lower global growth and higher energy import bills are clearly positive for the dollar. We emphasized at the start of the year how Asia FX was disproportionately important for broad dollar direction, and the region is being disproportionately hit by the crisis."

"The bigger the fiscal response to the energy shock outside of the US, the less positive this would be for the dollar via helping real incomes, suppressing inflation, and making it easier for central banks to raise real rates, in turn supportive of the currency. It is notable that the adjustments to central bank rate expectations this year have been much larger than in 2022 which has helped suppress the dollar positive reaction in FX."

"From an FX perspective, we would see the transmission channel as ultimately running through Fed pricing: any market event that pushes the US into a more dovish direction than the rest of the world may have a partially offsetting impact to the rise in energy prices."

"To sum up, developments over the last two weeks have on balance been dollar bullish."

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