USD: Conflict endgame risks point to renewed weakness – MUFG

MUFG’s Head of Research Derek Halpenny argues that while risk sentiment has improved on hopes the US will soon end its conflict with Iran, the recovery looks fragile and the US Dollar is likely to weaken again. He highlights ongoing geopolitical uncertainty, energy supply doubts, rising US fiscal and inflation risks, and falling foreign holdings of Treasuries as factors consistent with MUFG’s Dollar depreciation forecasts.

Risk rebound seen as fragile

"There is certainly a logic to this rebound in risk on renewed optimism but there are numerous questions that remain unanswered over how this conflict will evolve over the coming weeks."

"So, the recovery in risk is likely to remain fragile with doubts set to return over the improvement in energy supply conditions."

"Fiscal risks are set to worsen and the whole topic of confidence in US assets is likely to re-emerge in the period following an end to this conflict that likely means a quick reversal of recent US dollar strength and the resumption of the trend of US dollar depreciation."

"The decision to attack Iran will leave the region extremely unstable and inflation risks will likely continue to undermine the Trump administration ahead of the mid-terms in November."

"What we would say though in relation to FX is that the US dollar will look even more vulnerable following this conflict (again if it ends like being suggested)."

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