According to ING, the US dollar could face downward pressure if the Federal Reserve holds interest rates steady at its meeting on Wednesday, potentially realigning with the recent weakening trend in international crude oil prices.
On Wednesday, the Bloomberg Dollar Spot Index was nearly unchanged, marking its fourth consecutive session of limited movement, a performance that has notably diverged from the recent strength in oil prices. Data shows that as of Wednesday, the 60-day rolling correlation between the Bloomberg Dollar Spot Index and Brent crude oil futures has fallen to its lowest level since late March, indicating the dollar's movement has temporarily detached from the influence of oil price swings.
ING FX strategist Francesco Pesole noted that this resilience will be tested following the Federal Reserve's interest rate decision. If the Fed chooses to maintain rates, long dollar positions built on safe-haven and policy expectations could be unwound, potentially pushing the currency to reflect signals from the recent oil price retreat. Data from the Commodity Futures Trading Commission (CFTC) shows that trader bullishness on the dollar has reached its highest level since 2015 this year.
Earlier, US military strikes against Iran disrupted global energy supplies, driving oil prices higher and sparking concerns about a resurgence in inflation. While oil prices have since fluctuated amid the prolonged six-month conflict, markets still widely expect the Fed to raise rates in September. Currently, interest rate swaps imply the Fed will hold rates steady this week, but still price in roughly a 34% probability of a rate hike.
TD Securities also believes the dollar could weaken if the Fed holds its ground, though the extent of the decline will depend on the number of Federal Open Market Committee (FOMC) members voting to keep rates unchanged. ING suggests that unless Fed Chair John Walsh delivers a surprisingly hawkish signal after the meeting or more than two officials cast dissenting votes, the dollar is likely to come under pressure following the announcement.