US Dollar Predicted To Strengthen As Iran War Oil Shock Lifts Inflation Risks: ING

The US Dollar remained firm, with markets favouring the currency as geopolitical tensions escalated following the closure of the Strait of Hormuz.

ING notes that the longer the Strait remains shut, the greater the risk of a sustained oil price shock, reinforcing inflation pressures and supporting the US Dollar.

“The longer the Strait remains shut, the greater the oil shock.”

The bank highlights that rising energy costs are already feeding into inflation data, increasing the likelihood that central banks will be forced to maintain tighter policy settings, a backdrop that is negative for global growth but supportive of the dollar.

ING adds that current market conditions favour holding dollar exposure, particularly given elevated uncertainty around developments in the Gulf.

“Investors will not want to go home short dollar balances.”

ING expects the US Dollar to remain supported in the near-term, with safe-haven demand and rising inflation expectations underpinning the currency while geopolitical risks persist.

The bank also points to firm short-dated US yields and rising inflation expectations as key drivers, with markets increasingly pricing a more cautious Federal Reserve stance.

In the near term, ING sees the dollar index (DXY) biased higher towards the 99.15–99.50 area, particularly if inflation expectations continue to rise ahead of next week’s Federal Reserve meeting.