ING’s Chris Turner notes the US Dollar (USD) briefly weakened after news that the Strait of Hormuz was fully open, implying US Dollar Index (DXY) around 97.50/98.00 and EUR/USD just over 1.18 if the crisis were resolved. ING economists expect the Dollar to stay near those levels this quarter, with DXY instead likely trading around 98.00/98.50 as Federal Reserve (Fed) easing hopes fade.

Fed expectations and conflict drive DXY

"Friday's headline from Iranian authorities that the Strait of Hormuz was 'fully open' gave us a vision of where the dollar could be trading were this crisis over. That equated to around the 97.50/98.00 area in DXY and just over 1.18 in EUR/USD.

"The stop-start nature of peace talks does focus attention on when energy flows can fully restart and whether high oil prices will start to seep into other areas of the economy. We note another good speech from the Federal Reserve's Christopher Waller, released on Friday ahead of the Fed's blackout period. The speech was entitled 'One Transitory Shock After Another'."

"Recall that Waller voted for a cut in January, and the point he is making now is that the longer energy prices stay high, the greater the risk that this oil shock adds to the tariff shock and de-anchors inflation expectations. For him, the 5-10 year US inflation expectations derived through the 5Y5Y inflation swap look important."

"Any move to the 2.70/2.80% area, as seen in early 2022, could well call time on any hopes of Fed easing this year."

"We are not in the camp looking for an immediate return of the benign dollar decline that characterised the start of the year, and suspect DXY can trade in ranges near the 98.00/98.50 area."

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