MUFG’s Head of Research Derek Halpenny highlights that a two-week ceasefire between the US, Israel and Iran has sharply weakened the US Dollar as risk sentiment improves and Brent Oil falls. He argues this outcome is clearly bearish for the Dollar, reinforces monetary policy divergence with Europe, and could undermine confidence in US assets, with further short-term Dollar losses likely if negotiations progress.

Ceasefire shifts risk and Dollar outlook

"So there are a lot of uncertainties that will persist but having said that, this of course is a step in the right direction and we see this as reducing considerably, over the short-term at least, the risk of a major risk-off and with it a strengthening of the dollar."

"This outcome is a clear bearish outcome for the US dollar."

"The US dollar throughout this conflict has underperformed our expectations given the scale of energy price increase and under these circumstances of a ceasefire and possible deal will potentially suffer further losses over the short-term."

"However, uncertainties are high and hence we would expect markets to remain highly sensitive to incoming news on progress in the negotiations that lie ahead."

"Reversal trades in G10 on this positive news would imply the big underperformers throughout the conflict could perform best in the coming days – that would point to SEK and NZD performing well at the expense of NOK and GBP – the two top performers since the conflict began."

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