USD: The demand for safe haven may take a break as DXY remains limited – DBS

US Dollar’s Safe-Haven Appeal Hinges on Equity Performance

According to DBS strategist Philip Wee, the US Dollar's short-term status as a safe haven may stall unless American stocks drop to new lows for the year. He observes that investors have pulled back from pushing the DXY Index past 100.5, following comments from Federal Reserve Chair Jerome Powell. Powell tempered expectations for aggressive rate increases, emphasizing stable inflation forecasts and easing worries about a wage-price spiral reminiscent of the 1970s.

Market Caution Ahead of Holiday Weekend

As the Good Friday holiday approaches, US financial markets are expected to adopt a more cautious stance. Wee cautions that the recent recovery in US equities could simply be a temporary uptick, rather than a sustained rebound.

Dollar Strength Dependent on S&P 500 Movement

Wee notes that the US Dollar's safe-haven status may be on hold unless the S&P 500 experiences a significant decline to new yearly lows.

He adds that traders have stopped pushing the DXY Index above the key 100.5 mark after Powell resisted calls for more aggressive Fed rate hikes in response to rising energy prices. Powell signaled that inflation expectations remain steady and the Fed is not alarmed by the prospect of a wage-price spiral similar to that seen in the 1970s.

Fed’s Response to Geopolitical Tensions

Fed officials have followed Powell’s cautious approach regarding the Iranian conflict, echoing the wait-and-see stance taken after the Liberation Day tariffs. Fed Governor Michael Barr highlighted that ongoing tensions with Iran could impact both inflation and economic growth, with risks increasing the longer the conflict continues.

Economic Data Weakens Dollar’s Exceptionalism

The Atlanta Fed GDPNow model has challenged the narrative of US Dollar strength by forecasting economic growth at 1.95%, down from 3% at the start of Operation Epic Fury a month ago. Upcoming US jobs data on Friday is expected to reinforce factors that have recently pushed the US Treasury 10-year yield down from its 7-8 month high near 4.50%.