LIVE MARKETS-Why the dollar might be ready for a new rally

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WHY THE DOLLAR MIGHT BE READY FOR A NEW RALLY

The safe-haven dollar edged up on Wednesday after seven straight daily declines with investors hoping for a diplomatic breakthrough in the Middle East.

The general view is that investors are less inclined to rush into safe-haven assets – like the greenback - while falling oil prices helped ease concerns about potential adverse economic effects on the euro area and Japan, lending support to their currencies.

However, if the war were to end, markets could turn their attention back to the interest-rate outlook.

“Whether correct or not, we attribute this (recent dollar decline) partly to the premise that the oil price shock will be felt more strongly in euro area and UK inflation than in U.S. inflation,” says Thierry Wizman, global foreign exchange and rates strategist at Macquarie.

Wizman flags that market participants assume that the ECB and BoE will be more hawkish than the Fed when confronting their respective energy-price pass-throughs.

“It's not inconceivable that if oil and natural gas prices fall on an opening of the Strait of Hormuz, the recent relative hawkishness of the ECB and BoE compared to the Fed will reverse sharply, and we get a short period in which the euro and the pound will slip lower, while the dollar rallies,” he adds.

(Stefano Rebaudo)

FOR WEDNESDAY'S OTHER LIVE MARKETS POSTS

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