USD: Ongoing backing fueled by energy uncertainties – MUFG

US Dollar Strengthened by Ongoing Geopolitical Tensions

According to Lloyd Chan, Senior Currency Analyst at MUFG, persistent tensions between the US and Iran, along with threats to vital Middle Eastern energy infrastructure, are maintaining elevated energy risk premiums. This environment is lending support to the US Dollar. Rising oil prices and a general aversion to risk are contributing to higher inflation in the US and are likely to keep US interest rates elevated for an extended period, posing additional challenges for risk-sensitive assets worldwide.

Risk Premiums Continue to Bolster the Dollar

The length and intensity of the US–Iran standoff, as well as the extent of damage to energy facilities in the Middle East, remain crucial factors influencing global financial markets. Recent events suggest that the conflict could last longer than the four to five weeks previously indicated by President Trump, raising concerns about a drawn-out crisis.

An extended conflict increases the probability that heightened energy risk premiums will persist. There are also reports that Iran may introduce a tolling system at the Strait of Hormuz, which could prolong disruptions to global energy supplies even after active fighting ends, keeping uncertainty about energy availability high.

For investors, these dynamics continue to favor the US Dollar. The prevailing risk-averse mood, combined with the possibility that elevated energy costs will drive US inflation higher and keep interest rates up, is supporting the dollar and creating obstacles for assets that are sensitive to risk.

Key Factors to Watch

• Potential escalation of the conflict, including possible US military action on Kharg Island or near the Strait of Hormuz
• The introduction of a tolling mechanism by Iran at Hormuz, which could further disrupt energy supplies
• The impact of higher energy prices on inflation in both the US and Asia, including secondary effects on transportation and food costs
• Any credible indications that tensions are easing