US dollar update


Risk aversion has heightened in financial markets as confirmed reports of Israeli missiles hitting a site in Iran have escalated Middle Eastern geopolitical tensions. This was compounded by unexplained explosions at Isfahan Airport in central Iran, increasing the instability in the region.

The U.S. Dollar Index (DXY) has seen a notable increase, rising to 106.30 and potentially heading towards levels not seen in over five months due to reduced expectations for Federal Reserve rate cuts. The dollar’s rise is underpinned by the Federal Reserve’s hawkish outlook, reflecting ongoing inflation concerns and robust U.S. economic growth, which may delay any potential easing of rates.

Minneapolis Fed President Neel Kashkari and New York Fed President John Williams have both advocated for patience regarding rate adjustments, suggesting the next rate hike remains a possibility if inflationary pressures persist. This stance has shifted market expectations, with significant reductions in the likelihood of rate cuts in the near term: chances for a cut in June have fallen to 18.5%, July to 45.5%, with a more probable initial cut in September.

Supporting this view, recent U.S. economic indicators have reinforced signs of a resilient economy. The Philadelphia Fed Manufacturing Index notably increased to 15.5 in April, defying expectations for an increase of 1.5. Additionally, initial jobless claims remained steady at 212,000, better than anticipated. This data suggests a strong labor market, further complicating the Fed’s policy decisions.

U.S. Treasury yields have continued their upward trajectory, reflecting shifts in investor expectations around Fed monetary policy. Current yields for 2-year, 5-year, and 10-year bonds are at 4.96%, 4.63%, and 4.58%, respectively. These developments are in line with the strong economic performance, including lower-than-expected jobless claims and improvements in manufacturing output, which have bolstered the U.S. dollar’s position against major currencies.

In conclusion, the combination of escalating Middle Eastern tensions and solid economic data from the U.S. are playing pivotal roles in shaping the dynamics of the foreign exchange market. The Fed’s cautious stance on rate cuts, supported by ongoing inflation and a strong labor market, suggests that the U.S. dollar may continue to strengthen for the foreseeable future.


Market Views & Opinions

ING in today’s article “FX Daily: Middle East turmoil strengthens dollar position” concludes regarding the dollar:

“Today, expect geopolitical news to dominate. The US calendar is incidentally empty, and the shift in the Fed narrative to a more hawkish stance is hardly surprising at this point. It remains to be seen, however, how far FOMC members want to push the narrative of potential hikes at this point. The Philadelphia Fed Business Outlook survey – released yesterday – jumped to the highest in around two years, and while many other surveys are pointing to a less bright picture, the latest hard data has endorsed the few optimistic activity surveys, if anything. Risks remain skewed to a rally to 107.0 in DXY.”

 Reuters in today’s articleTake Five: Dancing to the dollar’s beatmentions that:

Just when it looked like rate cuts were coming any minute now, inflation has reared its head and the strength of the dollar is forcing other central bankers to protect their currencies and reconsider their policy choices.

What appeared to be a dead cert a few weeks ago – the Federal Reserve embarking on a series of markets-friendly rate cuts in the first half of the year – is now looking unlikely, just as earnings season ramps up.


Sticky U.S. inflation and oil up 14% this year means price pressures are back in focus.



The information in this report is of a general nature only. It is not a piece of personal financial advice. It does not take into account your objectives, financial situation, and personal needs.

a-Quant is not responsible for your actions and recommends you contact a licensed financial advisor before acting on any information contained in this general information report.

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