The US Dollar Index experiences a decline as the demand for safe-haven assets diminishes, coinciding with increasing diplomatic efforts aimed at reopening the Strait of Hormuz. Rebounding 10-year US Treasury yields may constrain the downside potential of the Greenback in light of diminishing inflation risks. Fed’s Schmid characterised the current policy as “not tight,” cautioning that elevated inflation and investments linked to AI could exert future upward pressure on prices. The US Dollar Index, which measures the value of the US Dollar against six major currencies, is extending its losses for the second successive day and trading around 99.90 during the Asian session on Wednesday. The Greenback may continue to lose ground as safe-haven demand recedes amid growing diplomatic momentum surrounding a potential agreement to reopen the Strait of Hormuz.

Qatari officials announced on Tuesday that an interim proposal had been drafted, with both Washington and Tehran indicating significant advancements toward reinstating access to the vital maritime transit route. This diplomatic breakthrough follows the decision by US President Donald Trump to suspend planned military strikes against Iran, opting to allow negotiations some latitude while insisting on the immediate reopening of the waterway. However, the US Dollar may experience slight support from a rebound in the benchmark 10-year US Treasury yield following its decline to 4.61% on Tuesday. The initial decline in yields was influenced by decreasing energy prices, which alleviated inflation concerns and moderated anticipations of a hawkish stance from the Federal Reserve.

Schmid highlights the inflation risks associated with AI, maintaining vigilance among Dollar bulls even as sentiment experiences a pullback. Fed’s Schmid conveyed a somewhat more hawkish stance, achieving a 7.3/10 on the FXS Speechtracker, which is slightly above the historical average of 7/10. He emphasised that the current policy is “not tight” and expressed concerns that inflation remains “too high” and “worrisome.” The focus on AI-related investment as a new catalyst for inflation, the caution that the recent disinflation and decreased energy prices could be fleeting, and the advocacy for stricter monetary policy to maintain the 2% target collectively highlight a tendency towards additional restraint, despite the resilience and relative balance of growth and the labour market.

By reaffirming the PCE gauge as the preferred inflation metric and cautioning against downplaying supply-shock-driven price pressures, the speech adopts a hawkish stance for the Dollar, even while recognising recent progress on inflation. The FXS Fed Sentiment Index decreased by 0.96 points to 145.80, indicating a minor reduction in perceived hawkishness compared to the previous reading. However, with the index still well above the 100 neutral line, the Fed remains firmly in hawkish territory despite the pullback, aligning with Schmid’s message that policy may need to tighten further even as the FXS Speechtracker score edges only marginally above the established baseline.