Why does HSBC expect the dollar to weaken despite gains?

The US dollar moved higher on Monday after weekend talks between Washington and Tehran failed to produce an agreement to end the ongoing conflict.

According to CNBC, the greenback gained 0.3% against the euro, trading at $1.169, and rose 0.25% against the British pound to $1.342.

The uptick in the currency came after peace negotiations broke down, followed by a statement from Donald Trump indicating that the US would initiate a blockade of all maritime traffic entering and exiting Iranian ports.

The announcement added to geopolitical uncertainty and provided modest support to the dollar.

Despite the escalation, investor demand for the dollar has remained measured since the beginning of the Iran conflict.

However, the currency has still posted gains of around 2% against a basket of major peers in March.

Market dynamics shaped by oil and financial conditions

Recent developments in global markets have created headwinds for other currencies.

Higher oil prices, a firmer US dollar, and tighter US financial conditions have collectively pressured foreign exchange markets.

The US dollar’s relative strength during the conflict has been largely attributed to the country’s self-sufficiency in energy production.

In contrast, economies such as the United Kingdom and the Eurozone remain more vulnerable to rising oil and gas prices due to their heavy reliance on imports.

This divergence has amplified the dollar’s appeal, particularly during periods of heightened geopolitical risk.

HSBC analysts remain cautious on the USD outlook

Analysts at HSBC highlighted the complexity of the current environment in a note issued on Friday.

While acknowledging the temptation to adjust forecasts in favour of a stronger dollar, they expressed hesitation.

According to CNBC, he wrote, "Embracing a stronger USD into our forecasts is tempting."

He also added that they were "reluctant" to make such a shift and instead expect the greenback to weaken over time.

The analysts pointed to two primary reasons underpinning their outlook.

First, referencing recent remarks by Federal Reserve Chair Jerome Powell, they stated, "When there is a lack of visibility, it is prudent to slow down rather than fully change direction."

"Second, since the Fed is not in a hiking cycle nor has turned outright hawkish, there are underlying constraints working against the broad USD," they added.

Gold under pressure amid shifting safe-haven demand

While the dollar has seen modest gains, other traditional safe-haven assets have not performed as strongly.

Gold has declined by around 10% from its all-time high since the United States and Israel began strikes on Iran on February 28.

HSBC analysts suggested that the precious metal’s upward trajectory could resume, but only under specific conditions.

They indicated that a sustained recovery in gold prices would likely require a cessation of hostilities, the full reopening of the Strait of Hormuz, and a stabilisation in oil prices at more consistent levels.

Until then, market participants are expected to remain focused on geopolitical developments and their broader impact on currencies and commodities.