ING said AI-related concerns have weakened traders’ confidence in further Federal Reserve tightening, leaving the U.S. dollar more exposed to declines in oil prices.
In an Oct. 21 note, ING FX strategist Francesco Pesole cited a brief fall in Brent crude on Oct. 20 after unconfirmed reports of progress in U.S.-Iran negotiations. ING said the U.S. Dollar Index briefly reached 101.50 during the oil move.
Pesole also pointed to traders unwinding crowded dollar positions. He argued that worries about technology stocks have made expectations for additional Fed tightening less firm, giving changes in crude prices more room to affect rate expectations and the currency.
In ING’s assessment, geopolitical risk is playing a larger role in supporting elevated crude prices as the supply outlook improves. Pesole said an oil decline could therefore add to pressure on the dollar through lower U.S. rate expectations.
A separate Reuters snapshot described in earlier coverage of Oct. 20 currency trading put the euro up 0.22% at $1.1235 and the Dollar Index down 0.25% at 101.71. Reuters linked the dollar’s weakness in part to lower oil prices and longer-dated U.S. Treasury yields. Those readings were a separate observation from the brief Brent move ING identified.
ING also cited U.S. housing data. The Census Bureau and the Department of Housing and Urban Development reported September housing starts at a seasonally adjusted annual rate of 1.221 million, an estimated 5.2% below August’s revised 1.288 million. The agencies said the monthly change had a margin of error of 11.8 percentage points, leaving insufficient statistical evidence to establish that starts fell.
Pesole favors a “gradual and orderly dollar decline” over a sharper drop. ING said its short-term valuation measure placed all nine other G10 currencies within 1.5 standard deviations of its dollar benchmark, offering no strong signal from that measure.
The oil assessment adds to ING’s earlier warning about technology-stock turbulence and the dollar. The Federal Reserve’s next policy meeting is scheduled for Oct. 27-28.
