US Dollar Forecast: DXY Rises as Oil Hits $80 and Inflation Fears Mount

Dollar Edges Higher as Oil Hits $80 and Inflation Fears Return

The U.S. Dollar is edging higher against a basket of major currencies late Thursday, supported by a touch of safe-haven buying, but mostly by another jump in Treasury yields as oil prices soared to $80 a barrel. Traders were back on edge today, worried about a prolonged U.S.-Iran War and higher inflation.

At 10:11 GMT, DXY is trading 99.060, up 0.285 or +0.29%.

Iran Says No Ceasefire, No Negotiations and Attacks an Oil Tanker

Higher oil prices were back in focus today as the fighting ramped up with Iran claiming to have attacked an oil tanker. Another sign that the war could drag on for weeks or months, Iran’s foreign minister told CNBC Thursday that his country has no reason to pursue a ceasefire, and “we don’t see any reason why we should negotiate.”

Although the U.S. government is expected to roll out a series of measures to keep the oil flowing out of the Middle East, nothing’s been done yet. This is critical because 20% of global production comes from that area through the Strait of Hormuz.

Today’s bullish price action suggests oil traders believe nothing can be done to protect tankers transporting oil and other shipping merchants. It also sounds like a difficult proposition to me because the protection would likely involve insurance companies and the movement of naval vessels into strategic and perhaps, vulnerable positions.

Every $10 Rise in Oil Adds 0.2 to 0.4% to U.S. Inflation

How high DXY rises at this time will depend on how expensive crude oil gets and for how long. This is what will drive inflation higher and subsequently Treasury yields and the greenback. According to Morningstar, a sustained $10 a barrel price rise is estimated to raise overall U.S. inflation by 0.2 to 0.4% over the following year. Since last Friday’s close, WTI crude oil is up about $12 per barrel. So yes, the fear of higher inflation is justified.

This Isn’t Safe-Haven Buying. It’s a Re-examination of the Dollar’s Value

I don’t agree with the press calling every rise in the U.S. Dollar a safe-haven buy. Treasury notes and gold aren’t behaving like safe-havens so what are traders actually buying the dollar for? My read is that the de-dollarization narrative is getting a second look. When the world gets genuinely dangerous, investors tend to remember why the dollar became the world’s reserve currency in the first place.

Trend Is Up with 100.000 the Next Reasonable Target

Technically, the trend is up according to the daily swing chart and DXY is well-supported by a pair of moving averages, the 200-day MA at 98.349 and the 50-day MA at 97.948. On the upside, 100.000 is a reasonable target, but it’s going to take aggressive new longs, willing to take offers, combined with short-covering to get there.

More Information in our Economic Calendar.