Brown Brothers Harriman’s Elias Haddad notes the Dollar has retraced part of its recent surge but still benefits from short-term haven demand linked to Dollar funding needs. Rising cross-currency basis points to higher USD borrowing costs as stress lifts demand for short-term funding. However, BBH warns that prolonged conflict and stagflation risks argue against sustained Dollar strength.

Funding stress underpins short term USD

"USD retraced some of this week’s sharp gains. Still, USD can continue to benefit in the short-term from haven bid driven by dollar funding needs. The cross-currency basis, the extra cost investors pay or receive to get dollars using another currency, has narrowed for the majors implying the cost of borrowing USD has increased."

"However, a protracted conflict that leads to further disruption in energy production and shipping raises the risk the US economy enters stagflation and worsens the already fragile US fiscal backdrop. That argues against sustained USD strength."

"Focus today are on the February ADP jobs (1:15pm London, 8:15am New York) and ISM services index (3:00pm London, 10:00am New York). Consensus expects ADP private payrolls at +50k vs. +22k in January. The ISM services index is projected at 53.5 vs. 53.8 in January."

"Pay attention to the ISM Prices Paid and Employment sub-indexes for signs that the tension between employment and inflation is diminishing or worsening. The Fed Beige Book (7:00pm London, 2:00pm New York) will also offer fresh anecdotal insights on the US labor market and inflation backdrops."

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