USD: Peak fear debate on Strait risks – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes that the Dollar is trading defensively even as Brent holds above $100 and European gas prices stay elevated. The bank highlights mixed news on shipping security through the Strait of Hormuz and questions whether markets are closer to peak fear, concluding that near-term USD risks remain skewed to the upside.

Strait security keeps USD risks elevated

"Brent crude oil prices are holding above $100 a barrel and natural gas prices in Europe remain just shy of recent highs. Iranian drones and missiles continue to batter energy infrastructure around the Persian Gulf. In parallel, USD is trading on the defensive against most major currencies, global sovereign bond yields pulled back from recent highs, while stock markets are finding a floor."

"News around the security of shipping through the crucial Strait of Horuz is mixed. Some countries (China, Pakistan, India, Turkiye, France, Italy) are reportedly securing side deals with Iran to keep their ships moving. That has stabilized the perceived risk of shipping through the Strait."

"Nevertheless, the head of the International Maritime Organization warned that naval escorts though the Strait cannot fully guarantee ships’ safety. The waterway’s narrow navigable channels (2-mile wide, or 3.7km) and proximity to Iran’s mountainous coastline leave vessels exposed to attacks."

"For financial markets, the key issue is whether we are closer to peak fear than to another leg higher in shipping security concerns. We lean towards the former, but with a very low conviction given US action so far appears more reactive than strategic. As such, near-term USD risks remain skewed to the upside."

"DXY holds under 100.00 while Brent stays above $100 a barrel. Stocks and bonds stable."

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