HSBC’s FX Viewpoint highlights that the US Dollar sits at a crossroads, driven by Middle East tensions, US trade policy shifts and the upcoming June Federal Open Market Committee (FOMC) under new Fed Chair Kevin Warsh. The bank expects a softer broad USD over the longer term but warns that any renewed Fed hike signals could support the Dollar.

Dollar outlook tied to Fed and geopolitics

"Developments in the Middle East remain a key market focus. So far, periods of escalating tension have generally been associated with higher oil prices and a firmer US dollar, while any easing has tended to produce the opposite effect. At present, there is no clear assurance of a quick resolution, and ongoing supply disruptions across key commodities continue to weigh on sentiment."

"US trade policy is once more on the market’s radar following the 2 June announcement from the Office of the United States Trade Representative (USTR). The proposal outlines tariffs of 10-12.5% on imports from 60 economies under investigation for the alleged use of forced labour in relation to import controls. The plan includes exemptions, notably for United States-Mexico-Canada Agreement (USMCA)-compliant goods and further carve-outs may be introduced after the public consultation closes on 7 July."

"With the 16-17 June Federal Open Market Committee (FOMC) meeting approaching, attention is increasingly turning to how the new Chair of the Federal Reserve (Fed), Kevin Warsh, frames the policy outlook. Markets are becoming more sensitive to the risk of a more hawkish Fed, particularly given the recent run of upside surprises in US activity data. Any meaningful shift in the Fed’s tone would likely have direct implications for the USD."

"The last comparable episode of rapid hawkish repricing in Fed expectations − late 2024 – was accompanied by broad-based US dollar strength."

"Our base case remains that it would be surprising for the Fed to signal that it is preparing to raise interest rates, and we continue to anticipate a softer broad USDover the longer term. That being said, any indication that rate hikes are back on the table would likely warrant a more positive USD view. As such, we are approaching a critical juncture."

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