USD: War-driven bid and funding stress risks – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes renewed risk aversion is lifting the Dollar as the Iran conflict escalates, with Oil higher and global equities and bonds weaker. He argues an ongoing energy shock, tighter major central banks and rising borrowing costs are negative for risk assets, keeping USD upside risks skewed while uncertainty over Iran’s response clouds sentiment.

War risk keeps Dollar underpinned

"Yesterday’s rebound gave way to renewed risk aversion with no clear off-ramp to the Iran war. Crude oil prices are rallying, global equity and bond markets are down, and USD is pushing higher against most major currencies."

"An energy shock with no end in sight, major central banks edging toward tightening despite weak growth, and rising borrowing costs hitting already stretched public finances are a brutal mix for risk assets. Until the fog of war clears, USD risks remain skewed to the upside driven by dollar funding needs in periods of financial market stress."

"Meanwhile, Axios reported this morning that the US is developing military options for a “final blow” in Iran that could include the use of ground forces and a massive bombing campaign."

"Expect US officials to step up jawboning today to manage risk sentiment. But Iran’s response to the US de-escalation pivot will ultimately decide whether peak risk aversion is behind us or still ahead. Worrisomely, Iran has both the capability and the incentive to destabilize global markets and impose as much economic/political pain on the US and its allies."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)