Analysts at HSBC believe that a strengthening US dollar looks attractive to sell it, but are hesitant to rush to forecasts and expect it to weaken for two reasons.
First, referring to a recent speech by Fed Chairman Jerome Powell, they pointed out that the US Federal Reserve (Fed) may take a pause in raising interest rates or even start lowering them. This reduces yields on U.S. assets (e.g., government bonds), making the dollar less attractive relative to other currencies.
Second, rising energy and commodity prices support the currencies of exporting countries while putting pressure on the dollar through rising inflation expectations and shifting trade balances. In the face of uncertainty, it is more prudent to slow the pace of change than to completely reverse course.
Since the Fed has not yet begun its interest rate hiking cycle and has not yet taken a hard stance, there are fundamental constraints working against the dollar.
Protective asset ratio
The dollar’s strength against other currencies in times of conflict is largely due to U.S. self-sufficiency in energy production. But during periods of acute instability, investors may switch to other defensive assets if the U.S. position in the conflict looks vulnerable.
The UK and eurozone economies are particularly vulnerable to rising oil and gas prices because of their heavy reliance on imports. Meanwhile, other traditional defensive assets such as gold have shown declines of around 10% from all-time highs since the US and Israeli strikes on Iran began.
HSBC analysts believe that the bullish trend in the precious metals market will resume only after the end of hostilities, full opening of the Strait of Hormuz and stabilization of oil prices.
