Brown Brothers Harriman’s (BBH) Elias Haddad notes that the US naval blockade of the Strait of Hormuz has pushed Brent Oil back above $100 and lifted the US Dollar (USD) as risk aversion returns. Despite the energy shock, BBH keeps a low-conviction view that the worst may be past and expects US Dollar Index (DXY) to remain in its 96.00–100.00 range over coming months.

Dollar stays supported within broad range

"President Donald Trump decision to layer a US naval blockade on top of Iran’s de-facto control over the crucial Strait of Hormuz risk prolonging the energy shock, and raise tensions with China, a significant buyer of Iranian oil. Unsurprisingly, Brent crude oil prices rallied back above $100 a barrel, rekindling risk aversion across markets. Stocks and bonds are down, while USD is firmer."

"The Trump administration’s latest move looks more like a negotiating gambit to reset the bargaining terms of Strait of Hormuz access before US domestic constraints (higher gasoline prices and long-term Treasury yields) force a diplomatic off-ramp. In parallel, the US naval blockade cuts off Iran’s oil export revenue stream and incentivizes countries still receiving energy from Iran – China, India, Pakistan, and Turkey – to press Teheran toward a deal."

"The energy shock may not be over, but we are sticking to our low conviction view that the worst may be in the rear-view mirror. If so, interest rate differentials between the US and other major economies will continue to keep the DXY (USD index) anchored within its nearly one-year 96.00-100.00 range over the next few months."

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