The recent conflict between the United States and Iran has concluded, shifting market focus back to the Federal Reserve and the US dollar.
Prior to the US-Iran tensions, the US Dollar Index had fallen to a near four-year low of 95.49, reflecting weak market confidence.
During the period of conflict, international crude oil prices rose persistently, elevating high inflation risks in Western nations, prompting the European Central Bank to raise interest rates and creating expectations for a Fed rate hike, which bolstered the dollar index.
Yesterday, the index reached a high of 101.77, representing a gain of 6.57% from the 95.49 low, indicating strong short-term momentum.
Post-Conflict Analysis and Inflation Outlook
With the US-Iran conflict over and the Strait of Hormuz reopening in an orderly manner, international oil prices have dropped below the $70 per barrel mark.
This suggests that US inflation rates could decline significantly in the coming months, substantially easing high inflation risks.
Current market expectations for Federal Reserve rate cuts appear excessive and somewhat irrational.
We anticipate that the high inflation driven by elevated oil prices will persist through July.
However, following July, both the US Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) annual rates are expected to show a notable decrease, which would likely cool expectations for further Fed rate hikes.
Assessing the Dollar's Trajectory
From the perspective of Federal Reserve rate hike expectations and US inflation data, the current rally in the dollar index may merely constitute a rebound within a broader downtrend rather than a sustained reversal.
The critical point will be the CPI and PCE data released in August.
If high inflation persists beyond that point, the assessment of this move as a rebound could prove incorrect.
Federal Reserve Policy Uncertainty
The reform intentions of Federal Reserve Chair Kevin Warsh present the greatest uncertainty.
During the June 17th interest rate decision, Warsh did not vote on the dot plot and introduced economic forward guidance—actions unprecedented under former Chair Powell's leadership.
Based on his statements, Warsh appears to support maintaining high interest rates to combat potential inflation risks.
Some initially viewed Warsh as a proxy for former President Trump, given his nomination by Trump and Trump's known support for accommodative monetary policy.
This "political alignment" perspective has confused many market analysts.
In reality, even if Warsh were considered a Trump proxy, he holds only one vote on the Federal Open Market Committee, and his personal views cannot solely dictate the final decisions of the seven-member committee.
Our analysis prefers to deduce Fed monetary policy from macroeconomic data, inflation, and unemployment rates rather than inferring policy based on perceived "proxy" relationships.
Yield Curve Implications
Examining US Treasury yields across various maturities, the six-month yield at 3.94% is approximately 32 basis points higher than the one-month yield of 3.62%.
Calculating based on 25-basis-point increments per hike, the Federal Reserve could implement more than one rate increase in the second half of the year.
This prospect provides an optimistic sentiment boost for the US dollar index's rebound trajectory.
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