US Dollar: Why Does Momentum Remain Subdued Amid Oil Risks? – ING

A softer US Dollar (USD) reflects the lingering impact of AI-related concerns and an unwinding of stretched positioning, according to ING’s Francesco Pesole. On short-term valuation measures, most G10 currencies are within 1.5 standard deviations against the Dollar. With lower Oil prices now viewed as a potential drag on the currency, the broader Fed, Oil and rates backdrop continues to favour a gradual USD decline.

Is the softer USD reacting differently to oil?

"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.)