USD: Escalation risks support Dollar strength – MUFG

MUFG’s Lloyd Chan notes that persistent geopolitical tensions around Iran are reinforcing USD strength. Elevated US yields, resilient labour data and fading expectations for Fed rate cuts underpin Dollar carry appeal. Prolonged disruptions to energy flows via the Strait of Hormuz are seen as particularly damaging for Asia, skewing risks toward a stronger USD in a risk-off environment.

Geopolitics and yields back stronger Dollar

"Geopolitical risks remain the dominant driver of market sentiment."

"US 2-year yields remain elevated above 3.8%, above the effective fed funds rate, with markets no longer pricing rate cuts this year."

"Together, these dynamics support USD carry appeal and keep the dollar bid in a risk off environment."

"As a result, oil prices are likely to remain elevated, with risks skewed toward further upside."

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