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Dollar gains tug-of-war between oil prices and shifting Fed outlook
Rabobank notes the dollar can keep a safe-haven premium if disruption in the Strait of Hormuz persists, even as cooler US data reduces expectations for further rate hikes.
The US dollar is being pulled in opposite directions by oil prices and the Federal Reserve, according to Rabobank senior FX strategist Jane Foley, who outlined the dynamic in a client note Thursday.
Foley said that in the past, crude oil typically moved opposite the dollar because oil is priced in dollars, so a stronger currency tends to make commodities more expensive for buyers. The relationship shifted in 2022, when Russia invaded Ukraine and the US strengthened its role as a major energy exporter, with the Iran war later disrupting shipping through the Strait of Hormuz and contributing to a major energy supply crisis.
In that setup, higher oil prices no longer behave as purely negative for the US economy, Foley argued. Instead, the higher price environment can support US energy exports by giving major producers room to ramp up production, while other economies such as the eurozone, which remains a major energy importer, face the combination of higher inflation and weaker growth.
The note also points to a second force for the greenback, the Fed. Softer-than-expected July payrolls and relatively benign July inflation have led investors to dial back expectations for additional rate hikes, which removes a key source of dollar support, even as shipping curbs tied to the Strait of Hormuz help sustain a safe-haven premium.
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