Brown Brothers Harriman (BBH) highlights that renewed Strait of Hormuz tensions have lifted Brent Oil nearly $10 from recent lows and weighed on global risk assets, with the US Dollar (USD) slightly firmer. Elias Haddad argues the worst of the energy shock is likely past and expects interest rate differentials to keep the US Dollar Index (DXY) anchored in its 96.00–100.00 range, underscoring the Dollar’s dominant global role.

DXY expected to stay rangebound

"Financial market risk sentiment turns sour on renewed concerns over the Strait of Hormuz naval blockade. The US Navy seized an Iranian ship in the Gulf of Oman and Iran vowed to retaliate soon. Brent crude oil prices are nearly $10 higher from Friday’s $86 a barrel low."

"We are sticking to our view that while the energy shock may not be over, the worst is probably behind us. The US “Open for All or Closed to All” approach to navigation for vessels transiting the Strait of Hormuz is more likely to accelerate a reopening of that crucial waterway because shared economic pain raises the incentives for all parties to reach a workable diplomatic off-ramp. As such, interest rate differentials between the US and other major economies should continue to keep the DXY (USD index) anchored within its nearly one-year 96.00-100.00 range."

"The Wall Street Journal reported that the United Arab Emirates (UAE) is exploring the possibility of securing a currency swap line from the Fed or Treasury to hedge against a more severe economic shock from the Iran war. The fact that a well-capitalized energy exporting country is entertaining the idea of a bilateral currency swap line with the US underscores the dollar’s dominant role in the global financial system as medium of exchange and unit of account."

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