(Bloomberg) — The US dollar will likely maintain its strong link to the price of oil for the rest of the year as the Iran war keeps crude prices elevated, according to the latest Markets Pulse survey.
In the poll of 124 respondents conducted from May 28 to June 3, more than half predicted the correlation will strengthen between the greenback and Brent crude futures, extending a relatively unusual pattern of the pair moving in tandem. More than a third predicted the two would drift lower together.
The war in Iran is now in its fourth month, and clashes this week marked the most serious flare-up since a ceasefire took effect in early April. The escalation has pushed concerns about the prospects for any peace deal back to the forefront.
The Bloomberg Dollar Spot Index surged after the start of the war as oil prices spiked and has since pared those gains as crude prices pulled back from their peak. The currency’s strength has been aided by the economy’s resilience, its role as a haven and a rise in bond yields fueled in part by expectations that the Federal Reserve will start raising interest rates as soon as late this year.
“The dollar has persistently traded above fair value as implied by rate spreads,” CIBC Capital Markets strategist Noah Buffam said. “Rate spreads have been moving to levels consistent with a stronger USD, partly because the US economy is expected to weather the oil shock a bit better than oil-importing economies.”
What Bloomberg Strategists say…
“Pressure from oil is clearly feeding into inflation worries and prompting traders to brace for the likelihood of higher borrowing costs in coming months. This dynamic is bolstering a stagflationary narrative and against a backdrop of increasingly interlinked markets, risk sentiment will be highly vulnerable.”
—Kristine Aquino, Managing Editor, Markets Live
For the full analysis, click here.
The jump in inflation caused by the oil shock is complicating the outlook for new Fed Chairman Kevin Warsh, who will lead his first FOMC meeting later this month.
Warsh was historically hawkish during his tenure as a Fed governor from 2006 to 2011, but more recently shifted to a much more dovish tone, in line with President Donald Trump’s repeated calls for lower rates.
That’s seen as likely to leave the Fed in wait-and-see mode this year. When asked to assign a probability to the Fed’s potential moves this year, the respondents to the Pulse survey put the highest odds — about 45% — on no change in monetary policy in 2026, with one hike taking second place with a 25% chance. Fed funds futures are pricing a roughly 60% chance of one increase by December.
Survey participants were split on where 30-year Treasury yields — which touched a nearly two-decade high in May — will end the year, though a majority expect them to move in tandem with oil as well. One-third of respondents said they expect those yields to finish 2026 above 5% while Brent stays above $90 a barrel, with another third expecting yields to fall below 5% and oil to end under $90.
Survey participants on average said there’s a 68% chance that front-month Brent crude futures will average more than $90 a barrel in the six months from March through August, which indicates they don’t expect a steep drop anytime soon.
“The question now becomes less about what oil is doing, and more where is the damage done from an inflation and monetary policy perspective,” Vanda Research strategist Viraj Patel said.
–With assistance from Anya Andrianova.
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