US Dollar: Safe haven support versus Fed repricing – Rabobank

Rabobank's Senior FX Strategist Jane Foley examines the evolving relationship between the US Dollar and oil, as well as its role as a safe haven. Foley points out that a reduction in the probability of Fed rate hikes could expose the Dollar to downside risks, while the Strait of Hormuz disruptions and the US's position as an energy exporter provide support for its safe haven status.

The US Dollar Index (DXY) has been influenced by market positioning, de-dollarization debates, and recent US economic data. Since around 2022, the US's energy exporter role has helped rekindle its safe haven credentials at the beginning of the Iran war. However, as correlations within the foreign exchange market are typically inconsistent, it is difficult to determine their reliability.

With Fed rate hike speculation weakening due to recent US data releases, further declines for the greenback are possible. Nevertheless, a spike in oil prices could counteract this trend. The softening of the Dollar following the July FOMC meeting, as traders questioned the Fed Chair's credibility, suggests that if rate hike speculation continues to diminish, the Dollar could face potential downside pressure.

The Strait of Hormuz's reopening remains a supportive factor for the Dollar, as long as shipping remains limited. Despite this, the market remains cautious about rebuilding long EUR positions. Cable's indecisiveness is attributed to investors analyzing mixed UK data, poor US results, and ongoing uncertainty surrounding the US-Iran conflict.

EUR/USD has seen gains above the 1.1500 mark, driven by the persistent Middle East crisis. US Producer Prices and weekly Claims data failed to meet market expectations, adding to the Dollar's soft performance. Gold has retreated, testing the $4,370 level, while Bitcoin struggles to regain the $64,000 level.