US Dollar Surges Amid Escalating Middle East Tensions
The US dollar has picked up momentum as crude oil prices surge due to escalating tensions in the Middle East, reviving inflation concerns and increasing expectations for further Federal Reserve tightening. This has lifted the US Treasury yields and raised the probability of a rate hike in September to 57% and December to 39%. The US Dollar Index (DXY) is currently trading near its May high of 101.82 and is on track to reach the target of 102.
Crude oil has rallied over 40% in just three weeks, with Brent crude trading above $100 and nearing the gap resistance of 26 May. The geopolitical risk premium in crude is increasing as tensions rise across both the Bab el-Mandeb Strait and Strait of Hormuz. If traders expect a swift resolution to the conflict, crude oil prices could reverse lower, dragging the US dollar with them.
According to the latest COT data, aggregate net-long exposure to the US dollar stood at $38.5 billion, just $1.3 billion below the 10-year high reached the previous week. Asset managers' net-long exposure rose to a 78-week high of 22,000 contracts.