US Dollar: Benign FX risk score with hawkish fed pricing – DBS

DBS Group Research’s FX Risk Score note by Chua Han Teng and Daisy Sharma highlights that FX risk has risen modestly in May and June but remains below prior Middle East conflict highs. The US Dollar (USD) has firmed on a hawkish reading of the first Federal Reserve (Fed) meeting under Chair Kevin Warsh, even as US-Iran tensions ease and structural concerns about US exceptionalism and fiscal sustainability persist.

FX risk score and USD dynamics

"This week’s featured insight is our Asset Risks Dashboard, which tracks conditions and gauge risk sentiment across four key asset classes (Equities, Interest Rates, Credit, and FX). Today we focus on FX."

"The FX risk score edged higher in May and June, but remained below the cyclical high reached during the flight to safety into the US dollar triggered by the onset of the Middle East conflict."

"While US-Iran tensions have de-escalated following the signing of an interim peace deal and the commencement of negotiations, the US dollar has strengthened in response to a hawkish market interpretation of the first US Fed meeting under new Chair Kevin Warsh in June."

"US funding conditions remain comfortable in the Euro and Japanese markets, albeit with a slight tightening bias."

"That said, the USD’s appeal continues to be challenged by investor concerns over US exceptionalism, long-term fiscal sustainability, and ongoing policy uncertainties."