ING’s Francesco Pesole notes that the US Dollar (USD) is benefiting from equity market turmoil and hawkish Federal Reserve (Fed) commentary, with safe-haven demand reinforcing its strength. He argues that while this may not mark a new long-term bullish USD cycle, near-term momentum remains positive. Pesole also warns that any future dovish repricing of the Fed curve could weaken the Dollar medium term.

Hard to pick a top

"The tech-led equity sell-off has started to significantly spill over into FX. Since the sentiment jitters originated in Asia and are centred on semiconductor stocks, the Aussie and Kiwi dollar have been hit hard, alongside SEK and NOK, which tend to underperform as liquidity dries up in risk-off conditions."

"The canonical safe havens USD, JPY, CHF are doing well, but only one – the dollar – can also offer an attractive domestic story from a growth and carry perspective."

"Whether this is a moderate correction in a stellar year for AI stocks or the start of a more prolonged equity downturn, USD should outperform while risk aversion holds. In the latter scenario, however, a potential dovish repricing in the Fed curve – if met with actual easing – could leave the greenback much weaker in the medium term."

"We still don’t think this is the start of a new bullish USD cycle, but near-term momentum remains bullish. Fespeak has also added support, with the generally neutral FOMC member Austan Goolsbee saying yesterday that inflation is too high and going the wrong way."

"US and Europe’s equity futures are stabilising this morning, suggesting consolidation may be more likely than another major leg higher in the dollar. But for now, we remain very cautious about picking a top in this USD move."

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