USD: Still upside risks – ING

The two major US macro events yesterday (the FOMC and TIC data) left very few marks on FX. Markets are understandably attaching limited value to dot plot projections given the high uncertainty of the tariff impact and recent oil volatility. And while keeping two rate cuts in the 2025 median projection may seem moderately dovish, the Fed sounded less concerned about growth and unemployment, ING's FX analyst Francesco Pesole notes.

Upside risks for USD persist

"Right after the Fed announcement, TIC data showed the unwinding of foreign US treasury holdings in April was quite contained (a decline of just $36bn out of $9tr). That suggests a greater role of domestic investors in the Treasury sell-off than the 'sell America' theme might have suggested. Anecdotal evidence in de-dollarisation remains significant, and at least another month of TIC data is needed to get a clearer picture."

"However, the dollar likely dodged a bullet with yesterday’s figures, and the lack of conclusive evidence of foreigners' exodus from Treasuries can make markets slightly more cautious in building additional risk premium on the dollar. Anyway, the short-term dominating driver remains geopolitics. Media reports are now strongly suggesting the US is preparing to directly attack Iran, perhaps as early as this weekend."

"The whole foundation of the high USD risk premium was the theme of US self-inflicted damage; and while that has seriously dented USD safe-haven appeal, the combination of geopolitical risks and high oil prices is not US-induced risks, and therefore the dollar is still in a more favourable spot than the energy-dependent safe-haven alternatives (like the euro) in this environment. Upside risks for USD persist."