US Dollar: Higher energy supports Fed tightening – ING

ING analysts Chris Turner, Frantisek Taborsky and Francesco Pesole note that higher energy prices and tensions in the Gulf are supporting the Dollar against low-yielding currencies. They highlight that US energy independence and live Fed tightening prospects underpin Dollar strength. ING expects the Dollar to stay in demand versus the Euro, Japanese Yen and Swiss Franc, with DXY seen grinding higher.

Dollar stays supported by energy

"In the G10 space, the dollar is holding up well, and the macro story should keep it supported. US energy independence will come back to the fore if Iran is effective in re-closing the Strait of Hormuz. And this time around, US rates should rise along with overseas rates given that prospects of Fed tightening are now live."

"Tomorrow sees the June CPI, where headline inflation is set to drop month-on-month. But with energy prices rising again and core inflation probably rising at 2.8/2.9% year-on-year, it looks too early for the market to price out a Fed rate hike this year."

"With energy prices turning bid again and no signs of an imminent slowdown in US activity to take the sting out of higher prices (keeping Fed tightening prospects alive), the dollar should hold onto its gains. Expect it to be favoured against low-yielding energy importers such as the euro and the yen. And in a world of higher interest rates, the Swiss franc lags."

"USD/CHF can retest last month's high at 0.8140, while DXY can grind to 101.50."

"The deteriorating situation in the Gulf and the rise in energy prices are supporting the dollar against the low-yielders, including the euro. Worryingly for Europe, natural gas prices are creeping higher again at a time of low inventories. In the absence of direction from the Fed, higher energy prices will keep tightening fears alive and the dollar in demand."