MUFG’s Senior Currency Analyst Lee Hardman notes that the surge in Oil prices linked to the Middle East conflict is reinforcing US Dollar strength, especially versus high-yielding emerging market currencies. He highlights that weaker US labour data would normally weigh on the Dollar, but the energy shock and hawkish repricing in rates are instead supporting USD within its 96.000–100.00 index range.

Oil-driven risk backdrop underpins Dollar

"The US dollar has continued to strengthen against other major currencies with the dollar index moving towards the top of the 96.000 to 100.00 trading range that has been in place since Q2 of last year."

"US dollar strength has been more evident against the high yielding emerging market currencies of the South African rand and Hungarian forint."

"Normally, the softer NFP report would have reinforced Fed rate cut expectations and weakened the US dollar in the absence the Middle East conflict."

"So far the US rate market has moved to push back both the timing and scale of further Fed rate cuts lifting US rates and the US dollar."

"Financial market conditions are becoming more challenging for carry trades triggering an unwind of popular positions with the FX market likely to become much more volatile the longer the conflict drags on."

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