Good morning. The dollar is easing off a one-month high ahead of tomorrow’s Federal Reserve meeting, caught between two countervailing forces: a fall in oil prices that is easing inflation fears, and a deepening selloff in global technology stocks that threatens the foundations of US exceptionalism. The euro, pound, yen, and Mexican peso are edging lower, while the Canadian dollar recovers its footing amid a lack of directional conviction.
Oil prices are extending their declines following Washington’s abrupt suspension of air strikes on Iran over the weekend. President Trump yesterday claimed the US was having “good talks” with Tehran, and Oman has reportedly presented a proposal for a joint regional mechanism to manage the Strait of Hormuz, but the geopolitical picture remains uncertain—Saudi Arabia, Jordan, and Iraq all reported drone attacks yesterday—and the physical disruption has not eased. Shipping through the Strait of Hormuz remains near zero, traffic through the Bab el-Mandeb has slowed to a trickle, and attacks on Saudi infrastructure are constraining pipeline flows. Brent crude is down 2.3% to $86 a barrel after settling nearly 9% lower in the previous session, capping a stretch of moves rivalling the wildest episodes of the past two decades: including the 2008 financial crisis, the 2015 shale meltdown, the 2020 Saudi price war, and the aftermath of Russia’s invasion of Ukraine.
The rout in the global technology sector is deepening. South Korea’s Kospi plunged more than 10% last night, at one point triggering a temporary trading halt, Japan and Taiwan are each down around 4%, and Nasdaq futures are pointing to a 1% decline at the open. After last week’s release by Moonshot AI of a model approaching the output of frontier laboratories, and yesterday’s reports that China has begun producing its own immersion deep-ultraviolet lithography machines for advanced semiconductor manufacturing, investors are questioning whether the US can preserve its leadership in the sector—and whether vast investments in data-centre capacity will pay off. Microsoft, Meta, and SK Hynix report quarterly earnings tomorrow, followed by Apple, Amazon, and Samsung.
Against this backdrop, investors are putting roughly one-in-three odds on a quarter-point hike at tomorrow’s Fed meeting, with a move fully priced for September. That implies the exchange rate reaction could exceed the typical 0.2–0.3% range, with a third of participants caught offside if the Fed holds and two-thirds if it tightens*. Should an overwhelming majority of officials revert to monetary policy orthodoxy and signal their intention to look through the commodity-led price surge, the dollar could give back its recent gains. If they adopt a more hawkish stance—treating the inflation overshoot as too persistent to ignore—the rally has room to extend.
*Note that a pause combined with hawkish rhetoric in the statement or press conference could leave medium-term policy pricing largely untouched, resulting in a more muted exchange-rate reaction.