US Dollar: Safe haven support versus Fed repricing – Rabobank

Rabobank's Senior FX Strategist Jane Foley analyzes the US Dollar’s (USD) evolving relationship with Oil and its safe haven role. Foley notes that reduced Fed rate hike speculation opens downside risks for the Dollar, but ongoing Strait of Hormuz disruptions and US energy exporter status support a premium. Market positioning, de-dollarisation debates and recent US data are highlighted as key drivers of US Dollar Index (DXY) performance.

Fed expectations and energy-linked haven flows

"Since around 2022, it is widely perceived that this relationship has altered, driven by the US’s current position as an energy exporter. This year, the US’s energy exporter status likely helped renew the USD’s safe haven credentials at the start of the Iran war. That said, correlations within the context of FX are rarely robust, reliable or straightforward given the confluence of factors that drive markets."

"Fed rate hike speculation has recently suffered a setback on the back of recent US data releases. This opens the prospect of further slippage for the greenback. That view, however, could still be thrown off course if oil prices spike higher again."

"The combination of yesterday’s fairly benign CPI inflation release and softer jobs data should reduce criticism of Fed Chair Warsh. The USD softened on the back of the July FOMC meeting as the market questioned the credibility of the Fed Chair and his claims that the Fed would drive inflation back to target."

"If Fed rate hike speculation continues to be pared back, in line with RaboResearch’s view, the USD will be exposed to potential downside pressures. That said, the uncertainties regarding the re-opening of the Strait of Hormuz remain a USD supportive factor. At the start of the Iran war, the market was positioned short of USDs."

"For as long as shipping through the Strait of Hormuz is curtailed, the USD is likely to retain a safe haven premium, supported by the US’s energy exporter status. By contrast, in these circumstances we would expect the market to remain wary of rebuilding long EUR positions."