Brown Brothers Harriman’s (BBH) Elias Haddad notes improving risk sentiment as Iran-related worries ease, with Oil softer, US equities firmer and yields retracing. Haddad argues the US Dollar Index (DXY) can overshoot its 96.00–100.00 range, supported by US rate differentials and resilient US growth, while European Central Bank (ECB) and Bank of England (BoE) expectations are less supportive for the Euro (EUR) and Pound (GBP).

Dollar seen supported by rate spreads

"Improving sentiment tied to the Iran war is driving markets. Crude oil prices are trading on the defensive, US stock futures extended record highs, and long-term bond yields continue to retrace their recent overshoot. USD is a little lower against most major currencies."

"In our view, the dollar index (DXY) can overshoot the upper end of its nearly one year 96.00-100.00 range in line with interest rate differentials between the US and other major economies. Moreover, US rate hike expectations are USD positive because they reflect a resilient US growth backdrop and sticky inflation."

"In contrast, ECB or BOE rate hike expectations are less supportive for EUR and GBP as they reflect a stagflationary mix of high inflation and weak growth."

"Additionally, liquidity and leverage vulnerabilities in the non-bank financial intermediation sector could amplify market stress."

"The ECB May Financial Stability Review does not move the dial on rate expectations. The ECB warned that prolonged geopolitical tensions, along with growing concerns about the sustainability of public finances, increases the risks to financial stability."

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