HSBC’s FX Viewpoint underscores that the US Dollar is at a pivotal moment, influenced by ongoing Middle East tensions, recent shifts in US trade policy, and the upcoming June Federal Open Market Committee (FOMC) meeting under new Fed Chair Kevin Warsh [1]. The report notes that periods of escalating Middle East tensions have generally led to higher oil prices and a stronger US dollar, while any easing in tensions has had the opposite effect. Currently, there is no clear sign of a quick resolution to these geopolitical issues, and ongoing supply disruptions in key commodities continue to impact market sentiment [1].
On the trade front, the US Dollar is also being affected by the 2 June announcement from the Office of the United States Trade Representative (USTR), which proposed tariffs of 10-12.5% on imports from 60 economies under investigation for alleged use of forced labour. The plan includes exemptions for United States-Mexico-Canada Agreement (USMCA)-compliant goods, with the possibility of further carve-outs after the public consultation closes on 7 July [1].
Attention is also turning to the 16-17 June FOMC meeting, where markets are increasingly sensitive to the risk of a more hawkish Federal Reserve, especially after recent upside surprises in US activity data. HSBC highlights that any meaningful shift in the Fed’s tone could have direct implications for the US Dollar, referencing that the last rapid hawkish repricing in late 2024 was accompanied by broad-based US dollar strength [1].
Despite these risks, HSBC’s base case is that it would be surprising for the Fed to signal preparations for raising interest rates, and the bank continues to anticipate a softer broad USD over the longer term. However, any indication that rate hikes are back on the table would likely warrant a more positive outlook for the US Dollar, marking the current period as a critical juncture for the currency [1].
CONCLUSION
HSBC sees the US Dollar at a crossroads, with its direction hinging on upcoming Fed policy signals, ongoing geopolitical tensions, and US trade policy developments. While a softer USD is expected over the longer term, any hawkish shift from the Fed could quickly reverse this outlook. Market participants are advised to closely monitor the June FOMC meeting and geopolitical developments for further cues.