US Dollar: Falls alongside Brent as US-Iran hopes build – MUFG

Pressure on the US Dollar (USD) has persisted since the US mid-term elections, with the US Dollar Index (DXY) lower and US yields easing as Brent Oil retreats towards its 200-day moving average, notes MUFG’s Lee Hardman. Fresh optimism about a possible US-Iran deal is seen as tempering inflation risks and eroding support for the Dollar. However, the forthcoming US nonfarm payrolls report could provide some short-term respite.

Are lower yields and Brent weighing on the Dollar?

"The US dollar has continued to weaken overnight extending the sell-off triggered by the US mid-term election results. The dollar index has now fallen by around 0.6% since the results were announced revealing a Blue wave as the Democrats decisively took control of Congress. The correction lower of the US dollar has also coincided with a further adjustment lower in US yields."

"The weaker US dollar and lower US yields have been encouraged by the sharp decline in the price of oil which is helping to ease market concerns over upside inflation risks. The price of Brent has fallen by around USD10/barrel since the US mid-term elections results were announced dropping back towards support from the 200-day moving average at around USD93.60/barrel. The price of oil had already been falling sharply at the start of this week and the mid-term election results have reinforced the sell-off."

"Overall, the latest developments have clearly boosted investor optimism over the prospect of a deal to end the US-Iran conflict. A less prolonged energy price shock would help to dampen the case for a stronger US dollar."

"Market attention at the end of this week will shift to the release of the last nonfarm payrolls report on Friday. Leading indicators of labour demand including yesterday’s ADP survey are signalling strengthening US employment growth which is confirmed on Friday could help to provide some support for the US dollar after the recent setback."

(An editor reviewed this article, which was produced with assistance from an Artificial Intelligence tool. Learn more.)