USD: Recovery relies on risk aversion – MUFG

FXStreet Insights Team FXStreet

MUFG’s Head of Research Derek Halpenny notes the US Dollar has stabilised after a modest rebound as markets reassess the fragile Middle East ceasefire and its impact on risk sentiment. He highlights that US monetary policy is unlikely to be a primary driver of Dollar strength, arguing that poor underlying fundamentals will cap gains unless risk aversion intensifies.

Dollar steadies as ceasefire doubts linger

"The US dollar is broadly stable so far in today’s trading after strengthening modestly into the close of trading yesterday as doubts quickly emerge and the questions we posed here yesterday remain unanswered."

"From the lows yesterday, the 2-year UST bond yield has drifted higher by about 6-7bps as doubts over the ceasefire intensify."

"Whatever way the conflict unfolds over the coming days and weeks, we doubt relative monetary policy dynamics will be a driver of US dollar strength."

"The US dollar’s best prospect of appreciation remains a more pronounced period of risk aversion that sees a flight to the dollar."

"But the general more modest gains for the dollar through this conflict to date we believe is indicative of poor underlying fundamentals for the dollar that will reassert themselves again if we do see further de-escalation in the coming weeks."

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

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