ING’s Chris Turner argues that while global risk assets are rallying and weighing on the US Dollar (USD), conditions for a sustained Dollar decline are not yet in place. Stable United States (US) interest rates, resilient foreign demand for US assets and lingering global growth headwinds suggest caution. Turner expects only mild Dollar softness near term, with US Dollar Index (DXY) unlikely to revisit year-to-date lows immediately.

Risk rally but limited Dollar downside

"Risk assets are recovering well as investors continue to position for de-escalation in the Middle East. The return to equity markets and to pro-growth and higher-yielding EM currencies has led to a broadly softer dollar. However, we question whether conditions are right for a sustained dollar decline just yet, when assessing factors like Fed policy, global growth and any evidence that foreign investors are quietly leaving US asset markets or increasing dollar hedge ratios."

"In all, it points to a Fed comfortable with the policy rate at 3.75%, where neither the labour market is deteriorating nor are second-round inflation effects growing. The case for renewed Fed easing has yet to be made, although the whole world will be glued to Kevin Warsh's confirmation hearing next Tuesday for any dovish plans."

"On the subject of global growth, it is tough to see markets overlooking the headwinds which have been created over the last month. Energy prices look higher on a sustained basis (though this is not as large a shock as 2022), while interest rates, unlike currencies, have notably failed to retrace any of their moves in March. These tighter financial conditions have to prove a brake on global growth, which will likely emerge in hard data over the coming months."

"Barring some negative headlines out of the Middle East, risk assets should stay mildly bid and the dollar mildly offered today, but we don't see conditions in place for DXY to make an immediate return to the lows of the year at 96. We have a couple of Fed speakers today and the weekly initial claims data, though these look unlikely to move markets."

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