USD softens after Trump talks down fears over prolonged conflict

USD: Oil price surge forcing President Trump to de-escalate conflict?

The US dollar has continued to trade at weaker levels after President Trump dampened investor concerns over the risk of a more prolonged conflict in the Middle East. After surging to a high yesterday of USD119.50/barrel, the price of Brent has dropped back to a low overnight of USD88.05/barrel. The wild ride for the price of oil was triggered by comments from President Trump yesterday stating that the war would end “very soon”. He claimed that the operation launched 10 days ago was “very far” ahead of schedule while describing the conflict as a “short-term excursion” which will be “finished pretty quickly”. However, he still indicated that “we’re gong to go further” even though “we’ve already won in many ways”. He stated that the conflict is unlikely to end within a week. At the same time, he attempted to provide reassurance that the US would take action to ensure the Strait of Hormuz stays open by threatening to respond with overwhelming force if Iran attempted to block or attack vessels in the Strait, and potentially having the US Navy escorting tankers. The timely comments from President Trump are perhaps an indication that the oil price spike was starting to become a bigger concern which could restraint the duration of the conflict. It is one  of the reasons in our latest our FX forecasts (click here) that we had assumed that the conflict was more likely to last weeks rather than months. A temporary energy price shock would be less disruptive for the global economy, and could see the US dollar continuing to give back recent gains. Admittedly, there is still the risk that the conflict and/or disruption to global oil supplies could drag on for longer than President Trump desires as the outcome is not entirely dependent on US military plans.  

In order to dampen higher oil prices, President Trump also stated that he could waive “certain oil-related sanctions to reduce prices” but didn’t offer any specifics beyond acknowledging he had discussed the topic with Russian President Putin in an phone call yesterday. It would be controversial move to ease oil sanctions imposed on Russia related to the Ukraine conflict. The US has already issued a temporary waiver to allow Indian refiners to purchase Russian oil. Other policy options under discussion to dampen higher energy prices according to people familiar with the matter include releasing emergency stockpiles, and pausing federal gas tax collections which would require approval by Congress. G7 finance ministers failed to reach an agreement yesterday for a joint release of oil reserves. French Finance Minister stated that the group is “not there yet” while a separate G7 official stated that there was a broad consensus to delay any release pending further analysis. The FT has reported that the US officials believe a joint release in the range of 300 million to 400 million barrels would be appropriate which would equate to around 2-3 weeks of normal flow through the Strait of Hormuz.               

Another factor which has been helping to dampen US dollar strength on the back of the energy price shock has been the recent move in yield spreads. There has been a bigger hawkish repricing in European rate markets than in the US. The 2-year US Treasury yield has increased by around 18bps since the close on 27^th February prior to the start of Operation Epic Fury while 2-year government bond yields in the euro area and UK have increased by 25bps and 36bps respectively. Market participants have taken the view that the ECB and BoE will be more sensitive to higher inflation given the policy rate in the euro area is already at neutral and inflation has proven more persistent in the UK. In contrast, the US rate market still expects the Fed to deliver 1-2 rate cuts this year with the Us economy expected to see relatively smaller pick-up in inflation pressures from the energy price shock. Please see our latest FX Weekly for more details (click here).

YIELD SPREADS HAVE MOVED AGAINST THE USD

Source: Bloomberg, Macrobond & MUFG GMR

CNY: Strong China trade report & daily fix provide support for CNY

The main economic data release overnight was the latest trade report from China for February. The report revealed that exports jumped by 21.8%Y/Y in the January-February period up from an increase of 6.6% in December. The combined reading for January and February helps to smooth out distortions the Lunar New Year holidays. Shipments to the US fell by -11%Y/Y in January-February down from -30% in December, and by -20% in 2025 as a whole. In contrast, exports to non-US destinations rose by 27.1%Y/Y in January-February up from 12.9% in December. The breakdown by destination revealed that exports to the EU increased by 27.8%Y/Y in January-February, and by 29.5%Y/Y to Asean countries.

The report highlights that China’s trade continues to hold up better than expected to disruption from US tariffs. Tariffs on exports to the US have fallen recently as well after the Supreme Court judged that the President Trump’s IEEPA tariffs were illegal. The reduction in tariff risks to trade had been encouraging policymakers in China to allow the renminbi to strengthen more against the US dollar this year prior to the Middle East conflict. The risk of an energy price shock for China’s economy is likely to dampen upside momentum in the near-term although the PBoC did set a stronger than expected daily fix overnight at just below the 6.9000-level.                

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com