A US diesel ban could lift the dollar before it hurts

A US diesel ban could lift the dollar before it hurts

Washington is considering a US diesel export ban as it searches for ways to contain record fuel prices. President Trump has backed keeping more diesel at home, while officials assess whether a full or partial restriction is workable. The political appeal is clear ahead of the November midterms. The economic case is weaker.

The US exported a record 1.6mn barrels a day of diesel in August, supplying markets across Latin America and Europe as disruption to Russian refining and the Iran war tightened global availability. Redirecting those barrels could initially lower prices around the Gulf Coast and in some pipeline-connected markets. But the US is not a fully integrated fuel market. Much of its refining capacity is concentrated on the Gulf Coast, while California and parts of the East Coast depend on imports. Pipeline constraints, regional fuel specifications and coastal shipping costs prevent surplus diesel from moving freely to where it is needed.

That fragmentation explains why a ban could prove self-defeating. If export outlets close and Gulf Coast storage fills, refiners may reduce throughput. Refineries produce diesel alongside gasoline and jet fuel, so lower runs would restrict several fuels. Domestic diesel prices might initially fall, but gasoline and jet fuel could rise as refinery utilization declines. Meanwhile, removing the largest source of seaborne diesel supply would send international prices sharply higher.

The historical parallel is useful, but imperfect. Congress restricted most US crude exports through the Energy Policy and Conservation Act of 1975 after the Arab oil embargo exposed America’s dependence on foreign supply. The policy depressed some domestic crude prices, benefiting refiners, but offered consumers limited protection from globally priced gasoline and diesel. It also became largely irrelevant as US production declined and imports increased.

Shale changed that calculation. By 2015, growing production of light, sweet crude was colliding with a US refining system designed largely for heavier imported grades. Congress lifted the restriction, and crude exports rose from less than 500,000 barrels a day in 2015 to almost 3mn by 2019. The Government Accountability Office found that repeal improved producer pricing and encouraged domestic output, while having limited effects on refined-product supply.

The proposal concerns diesel rather than crude, but the lesson still applies. Export restrictions can depress prices where supply becomes trapped without delivering broad consumer relief.

For the dollar, the reaction would probably unfold in two stages.

Initially, a ban could be dollar-positive. Higher international diesel prices would worsen the terms of trade of energy importers. Europe and parts of Asia would face greater transport and industrial costs, while fuel-dependent emerging markets could experience renewed inflation. Weaker global growth expectations, wider risk premiums and the possibility of delayed Federal Reserve easing would favour the dollar, particularly against currencies exposed to imported energy.

America’s emergence as a major petroleum exporter also means that an oil shock no longer carries the same clear deterioration in the US trade position seen during the 1970s. European Central Bank analysis shows that oil and the dollar have increasingly risen together, although the relationship depends on whether the shock comes from supply, demand or global risk aversion.

The second stage would be less supportive. A prolonged ban would reduce US export revenue, compress Gulf Coast refining margins and weaken refinery output. Retaliation could expose import-dependent US regions to even higher prices. It would also cast doubt on America’s reliability as an energy supplier while raising domestic transport costs.

The result could be a dollar rally that becomes harder to sustain. Energy importers would remain most vulnerable, but the broader DXY response would depend on whether safe-haven demand and higher US rate expectations outweighed weaker export income, softer energy investment and the cost of disrupting an integrated global market.

Strong US PMI pushes US dollar through 101

The dollar extended its advance above 101 on Wednesday as stronger US business activity pushed Treasury yields higher. The move also reinforced a shift already visible in recent sessions: although speculation around a diesel export ban has weighed on WTI, the dollar has continued to track US rates rather than domestic oil prices.

The S&P Global flash composite PMI rose from 56.0 to 58.4 in September, its strongest reading since July 2021. New orders accelerated across manufacturing and services, while backlogs and supply-chain delays pointed to growing pressure on capacity. The survey was consistent with annualised growth of around 5%, according to S&P Global, but also showed input-price pressures reaching their highest level in nearly four years.

DXY gained around 0.5% to trade near 101.1, its highest level in eight weeks. Front-end yields led the response, with the two-year Treasury reaching 4.9% as markets added to expectations of further Federal Reserve tightening. The ten-year yield moved back through 5%, leaving the 2s10s curve close to 20 basis points. The steepening suggests that the market is responding to stronger nominal growth and persistent price pressure.

That distinction connects directly with the debate around a potential US diesel export ban. Speculation about restrictions has pushed WTI back towards $93 after it traded above $105 earlier this month. More diesel remaining in the US could eventually reduce refinery runs and weigh on demand for domestic crude, while the removal of US exports from international markets would leave Europe and Latin America facing tighter supply.

The chart below captures how the dollar is trading through those competing forces. WTI has retreated sharply, but the two-year yield and DXY have continued to rise. For now, the rate channel is stronger than the decline in US oil prices. The market is focused on the possibility that resilient demand, capacity constraints and higher input costs will keep the Federal Reserve tightening for longer.

Geopolitics still supports that outlook, even as talks between the US and Iran continue. Without a concrete agreement that restores trade through the Strait of Hormuz, the international energy shock is unlikely to disappear quickly. A US diesel export ban could deepen the regional split by lowering some domestic energy prices while raising fuel costs abroad. That would initially favour the dollar against energy-importing currencies through wider rate differentials and weaker growth expectations outside the US.

From a technical perspective, holding above 101 would keep the focus on 101.5, followed by 102. Thursday’s jobless claims and incoming Federal Reserve commentary will help determine whether the latest rise in yields has further room to run.

For now, the message from the chart is straightforward: lower WTI has not derailed the dollar because US growth and rate expectations have taken control.

Record yield gap keeps the Loonie under pressure

The OECD has cut Canada’s growth forecasts while raising its inflation projections, reinforcing the Bank of Canada’s cautious fourth-quarter outlook. Although Canadian short-term yields rose during this week’s bond selloff, US yields increased more sharply. The US-Canada two-year spread has widened to a cycle high of 151 basis points, providing a persistent tailwind for USD/CAD.

Trade tensions are already affecting businesses on both sides of the border, including California vineyards hit by Canada’s retaliatory alcohol boycott. India is working to accelerate a trade agreement with Ottawa, but greater diversification will take time. Markets are focused on September 29, when the next round of US import restrictions is due to begin.

USD/CAD has risen for eight consecutive sessions and is testing the 1.4106 intraday high. The move above 1.40 has strengthened the near-term structure, with that level now providing initial support. A firm close above 1.41 would bring 1.42 into view. Interest-rate expectations remain supportive, with the OIS curve pointing to a 2.75% Bank of Canada overnight rate at year-end, well below the expected Federal Reserve path. Without progress on trade, rate spreads and domestic uncertainty should keep the Canadian dollar under pressure.

Stronger dollar pressures peso ahead of Banxico

The Mexican peso fell 1.11% on Wednesday, underperforming major currencies as strong US PMI data gave the dollar fresh support. The US-Mexico two-year spread has compressed to around 300 basis points, a level that may lead investors to reassess peso carry positions. One-month implied volatility has also risen to a cycle high of 8.575%, reducing the appeal of holding the currency for yield.

Attention now turns to Banxico’s policy decision, with the benchmark rate expected to remain at 6.50%. The statement will matter more than the decision itself. Acknowledging the narrower rate spread while signalling that rates will remain unchanged for longer could help steady the peso. Any suggestion that cuts are approaching would place further pressure on carry positions. Signs of progress toward a US-Mexico trade agreement could offer some support, but interest-rate differentials will be of focus.

USD/MXN has moved above its 100-day moving average and the previous resistance level at 17.27, strengthening the near-term upward trend. A sustained move above 17.50 would bring 17.80 into view, while 17.00 now provides more distant support. Thursday’s Banxico statement is the main domestic event, although US jobless claims and Federal Reserve commentary could also influence the pair.

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Calendar: September 21 – 25

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.