Brown Brothers Harriman’s Elias Haddad observes that the US Dollar has retraced some of its recent sharp gains but continues to benefit from short-term haven demand, particularly due to increased dollar funding needs. The narrowing of the cross-currency basis for major currencies indicates that the cost of borrowing USD has risen, reflecting heightened stress and supporting short-term demand for the Dollar [1].
BBH cautions that while these funding stresses underpin near-term USD strength, the outlook for sustained gains is less certain. A prolonged conflict that disrupts energy production and shipping could increase the risk of stagflation in the US economy and exacerbate the already fragile US fiscal situation, which would argue against continued Dollar strength over the longer term [1].
Market participants are closely watching upcoming US economic data releases, including the February ADP private payrolls report, expected at +50k versus +22k in January, and the ISM services index, projected at 53.5 compared to 53.8 in January. Particular attention is being paid to the ISM Prices Paid and Employment sub-indexes for indications of whether the tension between employment and inflation is easing or worsening. Additionally, the Fed Beige Book will provide new anecdotal insights into the US labor market and inflation backdrop later in the day [1].
CONCLUSION
Short-term haven demand and increased USD borrowing costs are supporting the Dollar, but BBH warns that risks from prolonged conflict and stagflation could undermine sustained strength. Upcoming US economic data and the Fed Beige Book are expected to provide further clarity on labor market and inflation trends. The market impact is medium, with sentiment slightly positive due to short-term support but tempered by longer-term risks.