USD: Backed as Fed Considers Impact of Energy Shock – MUFG

Fed Maintains Policy Amid Global Uncertainty

Lloyd Chan, Senior Currency Analyst at MUFG, highlights that the Federal Reserve has left its monetary policy unchanged and now anticipates just one rate reduction in 2026. Ongoing tensions between the US and Iran, along with rising energy costs, are making the economic outlook increasingly uncertain. MUFG cautions that a prolonged surge in oil prices could significantly elevate US inflation, potentially prompting the Fed to implement an additional rate hike to safeguard against inflation, thereby keeping the Dollar resilient.

Dollar Strengthens as Fed Adopts Careful Approach

• The Fed has kept interest rates steady, and its latest projections indicate only one rate cut is expected this year.
• Fed Chair Powell has acknowledged that the policy landscape is more complicated, citing the unpredictability stemming from the US-Iran conflict.
• Higher energy prices are increasing inflationary pressures, while signs of a weakening labor market are encouraging the Fed to remain cautious in the short term.
• If oil prices were to remain elevated—such as reaching USD150 per barrel—US inflation could climb to around 5%, which might lead to a precautionary rate hike.
• In the current climate of heightened risk aversion, the US Dollar continues to be supported.

This article was produced with assistance from an AI tool and reviewed by an editor.