US Dollar: Softer momentum persists with oil risks – ING

ING’s Francesco Pesole notes the US Dollar (USD) is trading with a soft undertone as AI-related concerns and stretched positioning unwind. Short-term valuation metrics show most G10 currencies within 1.5 standard deviations versus the Dollar. Lower Oil prices are now seen as potentially damaging for the Dollar, while Fed, Oil and rates narratives still broadly support a gradual USD decline.

Soft USD, changing oil reaction

"The dollar continues to trade with a soft undertone. That, to us, is a mix of some aftereffects of AI-related concerns (Corewave bonds had another wobble yesterday) and stretched longs/ short-term overvaluations being unwound. That said, the dollar no longer looks particularly stretched on our short-term valuation metrics."

"Yesterday, there was also a reminder that lower oil prices can damage the dollar. A short-lived drop in Brent on unconfirmed reports of Middle East negotiation progress was enough to send DXY briefly to 101.50. With the supply picture improving, elevated oil prices are relying increasingly on geopolitical risk."

"And the dollar’s reaction function to oil may have changed over the past week or so. Rising concerns about tech stocks have somewhat dented the market’s hawkish conviction on the Fed, allowing for greater dovish flexibility at the front end in response to non-data inputs like an oil selloff."

"Yesterday’s surprise drop in housing starts reinforced the notion of a deteriorating real estate market. Attention will instead centre on any follow-up headlines pointing to progress in US-Iran negotiations today."

"We recognise that the softer dollar backdrop has shifted the balance of risks somewhat further in a USD-bearish direction. Even so, we continue to favour a gradual and orderly dollar decline rather than a sharper depreciation. The broader Fed, oil and rates narrative remains supportive."

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