Since Jan'25 DXY has fallen from 110 levels to current levels of 98.70. Much of it was because of Trump frequent policy changes, outflows from US equities & incremental flows towards Eurozone where a large scale fiscal expansion is about to begin. We have been bearish DXY for long since early CY25 but now we believe it is time for a short term correction towards 102 levels on DXY. Our primary reason is geopolitical risk & a hawkish Fed. With brent near 80, all energy importers will feel heat. But US is a net oil exporting country. While everyone’s attention in June was on the nuclear talks between Tehran and Washington, a unique fact escaped headlines. For just a week in early June, the US didn’t import a single barrel of Saudi crude — a feat only seen once before in half a century. Today, the US pumps more than a fifth of the world’s total oil. It’s worth repeating: Two out of 10 barrels worldwide are made in the USA. The last time the country had such a large share of the global market was 55 years ago. Hence we believe in case there is a full-blown middle east crisis, DXY will be the sole gainer because US has complete energy security compared to EU/Japan/UK which are exposed to high crude prices via high net imports. In addition, if Trump decides to give US military support to Israel through direct action, US return as the sole super power in the world won’t be questioned. Hence a full-blown Israel Iran supports a sharp pull back in DXY towards 102 levels. The price action this week illustrates that the dollar smile is indeed alive and kicking, and that spikes in vol do provide a bid to the dollar. Also market positioning has become too one sided against DXY. The dollar is cheap relative to various contemporaneous drivers as is evident in the broad TWI or EUR/USD where the fair value has declined to 1.08-1.0950. The lower fair value has been partly driven by a worsening in terms of trade (in addition to a move in real yields in favour of the dollar). We believe DXY is poised for a short-term bounce towards 102 levels with stop near 97 level. Currently it is at 98.7. Both middle east tensions, a hawkish Powell & market positioning augurs well for a short-term bounce towards 102 for DXY. GBP is best suited to express this view considering the dovish BOE outcome as well as weak macro data such as retail sales, employment & GDP data.
