ING’s Chris Turner notes the Dollar has strengthened as the Middle East conflict drives higher energy prices, favouring energy exporters over importers in Europe and Asia. He argues the Dollar is best placed to benefit from this energy shock, especially while investors unwind overweight positions in Europe and emerging markets. Limited US data and potential hawkish tones from the Fed could further support the Dollar and DXY.

Energy shock underpins Dollar strength

"The dollar was stronger across the board yesterday as investors reacted to the surge in energy prices. One of the biggest intraday moves occurred when headlines broke of Qatar suspending gas production after an Iranian attack on its facilities. As our commodities team notes, the gas market went into this conflict tighter than the crude oil market and thus is more susceptible to larger price spikes."

"And given investors went into this crisis with large overweight positions in Europe and emerging markets – in currencies and equities – both currency blocs look susceptible to further unwinding should energy prices stay high. So, unless someone like China, a huge buyer of Iranian crude, can convince Iranian forces from attacking production facilities and threatening shipping, we expect European and EM currencies to stay vulnerable. For reference, European natural gas futures have just re-opened back near their highs."

"There is little US data of note today, and we have a speech from the Fed's John Williams at 15:55CET. He sits at the doveish end of the spectrum. But any concern over sticky inflation could add to this week's upside pressure on short-dated US rates and lift the dollar further."

"DXY looks likely to stay bid in the near term. 99.50/100.00 looks like the target whilst energy prices remain bid."

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