Brown Brothers Harriman’s Elias Haddad notes that the Dollar has given back some post-payroll gains as optimism over a US-Iran breakthrough weighed on Brent Oil, but the bank still expects USD to edge higher near term. They argue resilient US economic activity and a likely hawkish Fed hold should underpin USD despite easing geopolitical fears.

Hawkish Fed stance underpins Dollar

"USD trimmed some of its post-payroll gains last week as optimism over a US-Iran breakthrough sent Brent crude oil prices tumbling to a three-month low. We are sticking to our view that USD can edge higher in the near-term. Resilient US economic activity in both absolute and relative terms outweigh the drag to USD from easing geopolitical fears."

"The center of gravity on the FOMC has shifted from an easing to a neutral bias as US labor demand has improved and inflation has moved up. As such, the focus will be on the degree of hawkishness and whether it validates Fed funds futures pricing for a 25bps hike by year end or leans against it. The clearest signal will come from the dot plot, which is expected to shift from implying a 25bps cut in 2026 to a median projection consistent with a 25bps hike."

"Bottom line: a hawkish Fed hold should support USD, but Warsh risks spoiling the dollar bull party. Check out our report here to see what a Kevin Warsh-led Fed means for markets beyond this week’s decision."

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