USD: Yield spreads and policy risk cap upside – MUFG

FXStreet Insights Team FXStreet

MUFG’s Lee Hardman argues the US Dollar’s response to the Middle East-driven energy shock has lost momentum. He cites lingering optimism about a relatively quick end to the conflict, a higher US policy risk premium, and yield spreads moving against the Dollar as key factors. Fed officials signal rates may stay on hold while markets remain undecided on the next move.

Policy risk and rates temper Dollar gains

"The US dollar has strengthened in response to the energy price shock triggered by the Middle East conflict but has noticeably lost upward momentum in recent weeks."

"Firstly, it could reflect lingering investor optimism that the Middle East conflict and will end soon and is quickly followed by the re-opening of the Strait of Hormuz."

"Secondly, US dollar strength could have been dampened recently by the pricing in of a higher US policy risk premium to reflect fresh uncertainty triggered by the Middle East conflict although it is difficult to quantify."

"Thirdly, the short-term yield spreads have been moving sharply against the US dollar over the past month."

"US rate market pricing is also currently sat on the fence over whether the next policy move will be a cut or a hike."

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

Author

FXStreet Insights Team

FXStreet

The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.

GBP/USD clings to small gains near 1.3450 after UK jobs data

GBP/USD trades in positive territory at around 1.3450 in the European session on Tuesday. The UK ILO Unemployment Rate remained at 4.9% in the three months to May, compared with expectations of 5%, but failed to provide any impetus to the British Pound's renewed uptick. Traders stay cautious amid US-Iran uncertainty and the UK political transition.

EUR/USD keeps range above 1.1400 after German ZEW

EUR/USD is keeping its range above 1.1400 in Tuesday's European session, as the US Dollar (USD) retreats following Monday's rebound. Nevertheless, the uncertainty around the US-Iran conflict limits the pair's upside. Meanwhile, the Euro (EUR) pays little heed to the strong German sentiment data, as traders await Thursday's European Central Bank policy announcements, which could drive the Euro's near-term valuation.

Gold extends recovery toward $4,100

Gold gains traction following Monday's choppy action and advances toward $4,100 on Tuesday. However, the uncertainty surrounding the conflict in the Middle East and growing expectations for a hawkish Federal Reserve policy outlook could make it difficult for the precious metal to gather bullish momentum in the near term.

Bitcoin extends advance as ETF inflows, Iran war mediators' proposal lift risk mood

Bitcoin extends its gains, trading above $65,800 after closing above the key technical hurdle the previous day. The bullish price action is further supported by the return of institutional demand, with spot Exchange Traded Funds continuing their inflows on Monday. In addition, the renewed hopes for peace between the US and Iran have lifted risk sentiment, providing an additional tailwind for the Crypto King.

Buy the dip on the Dow Jones and S&P? Forex Trading Gold descending triangle

Trading during a war, a pandemic, during trade disputes, and other geopolitical events, especially when some major players are sociopathic, can be quite challenging. The Iran war is no exception. The Iran war is no exception.

US Dollar mid-year outlook: Exceptional currency, exceptional risks?

The US Dollar enters the second half of 2026 in a markedly different position from a year ago. The King currency has recovered, reflecting persistent US inflation, changing expectations for Fed policy, geopolitical tensions and renewed demand for defensive assets.