MUFG’s Senior Currency Analyst Lee Hardman notes the US Dollar remains under pressure after a sharp sell-off linked to de-escalation in the Middle East. The Dollar index again failed to clear 100.00 and retreated toward 98.88. Hardman highlights ongoing geopolitical uncertainty and warns that unresolved Strait of Hormuz disruptions could keep FX volatility, especially in EM currencies, elevated.

Dollar index capped as risk premium fades

"The US dollar has continued to trade at weaker levels overnight after yesterday’s sharp sell-off triggered by the de-escalation of the Middle East conflict. The dollar index once again failed to break above resistance at the 100.00-level and dropped back to a low yesterday at 98.880."

"President Trump’s decision to step back from striking energy infrastructure in Iran for at least five days to allow for negotiations with Iran, has helped to reduce the immediate risk of further damage to energy sites in the Middle East. Iran had threatened to retaliate by launching further attacks on energy sites in the Middle East."

"For financial markets what matters most is whether energy supply is able to normalize through the Strait of Hormuz. It currently remains effectively closed which if not resolved in the coming weeks and months could deliver an even bigger negative energy price shock for the global economy."

"While the conflict and energy supply disruption continues, foreign exchange markets are likely to remain volatile. The pick-up in volatility has been greater for emerging market currencies than for G10."

"JPMorgan’s measure of one-month EM FX volatility has risen to the highest levels since last April following President Trump’s “Liberation Day” tariff announcements while G10 FX volatility is still well below levels from last April."

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