Bold takeaway: the Iran conflict has triggered only modest FX disruptions so far, but the risk to the dollar remains elevated as energy prices surge and the Fed’s policy path stays uncertain. And this is the part most people miss: the spillovers to Europe, Asia, and emerging markets could intensify if energy costs stay elevated longer than expected, reshaping global financial flows.
FX SUMMARY
- Overall impact: So far, the market’s reaction to the weekend attack on Iran has been restrained. The dollar is slightly firmer, while the Swiss franc has outperformed. A stronger dollar stance is not yet being challenged, and higher natural gas prices today suggest renewed pressure on the euro.
- Key channels driving dollar strength: three main mechanisms appear to be at work.
1) Energy independence and energy dependence: As long as the Middle East conflict persists and energy prices stay high, external balances of fossil-fuel importing currencies (notably the euro and the yen) come under pressure. Europe’s TTF natural gas price jumped about 25% after Brent’s upsurge, reinforcing this dynamic.
2) Fed policy implications: Fed futures shifted lower in Asia, implying traders doubt whether the Fed can deliver two rate cuts this year. The energy shock arrives as the Fed has signaled patience on inflation; if inflation doesn’t weaken soon, rate cuts may be delayed, keeping the curve bearishly steeper and dollar-supportive.
3) EM capital flows: Higher energy costs and doubts about Fed easing can reverse portfolio inflows into emerging markets, weakening EM currencies and potentially reversing prior rallies in EM bonds and equities. A shift away from EM could reinforce dollar strength.
- Near-term outlook for the dollar: With the DXY breaking through 98.00 and energy markets remaining unsettled, a path back toward 100 this month isn’t out of the question if de-escalation remains distant and energy pressures persist.
EUROPEAN CURRENCY VIEW
- EUR/USD: Elevated energy costs temper the cyclical recovery story for Europe. If de-escalation remains elusive, EUR/USD may retreat toward the 1.1575–1.1650 range, with a downside tilt toward 1.1575–1.1600 paid for by ongoing energy-driven pressure. While the dollar’s safe-haven status has been questioned this year, the current shock favors the greenback.
- ECB posture: Christine Lagarde’s speech at 3:00 PM CET will be watched for any hawkish tilt that could offer brief euro support, though a decisive policy shift is unlikely given the energy shock and inflation trajectory.
- EUR/CHF: The pair has edged toward 0.90, hinting at renewed structural pressure on the Swiss franc. Swiss rate expectations look set to turn more negative again as the SNB contends with external energy-driven inflation and dollar strength.
CENTRAL AND EASTERN EUROPEAN (CEE) VIEW
- Exposure pattern: Hungary and Turkey are the most vulnerable within the region due to their energy imports and higher sensitivity to oil and gas prices, combined with a stronger dollar.
- Inflation linkages: A 10% rise in oil could lift CPI by roughly 1.1 pp in Turkey and about 0.45 pp in Hungary, while the Czech Republic could see around 0.2 pp. Central banks in the region may delay cuts until the energy shock clears, with Poland’s meeting Wednesday serving as a key test.
- Market positioning: Long EM positioning is being tested by the crisis. The Turkish lira and Hungarian forint look most at risk from renewed risk-off sentiment, while the Turkish central bank has signaled readiness to intervene, helped by substantial FX reserves. EUR/HUF is likely to face the strongest upward pressure.
CIS (Commonwealth of Independent States)
- Immediate reaction: Oil and gold price moves could bolster export earnings for fuel and gold exporters like Kazakhstan, Azerbaijan, and Uzbekistan, yet the near-term FX response will be uneven due to domestic constraints and risk-off dynamics.
- Country nuances: Kazakhstan’s tenge may see limited pass-through from oil, with vulnerability to dividend flows and sovereign fund activity; Uzbekistan’s som is somewhat insulated by its gold linkage but constrained by deficits; Azerbaijan’s manat remains anchored to a dollar peg, with higher oil reducing the risk of de-pegging.
- Short-term posture: Exercise caution on the tenge given oil exposure and risk-off sensitivity; the som could benefit modestly from uncertainty, but longer-term gains are uncertain.
OUTLOOK AND DATA FLOW
- Data cadence: Market attention will lean toward Middle East headlines over incoming U.S. data this week. The February ISM manufacturing report may hold interest, particularly the prices paid component, for clues on inflation momentum.
- Narrative risk: The situation could invite sharper shifts in tone from policymakers and markets depending on de-escalation timing and energy price persistence.
Bottom line: The initial market reaction has been limited, but the structural risks remain significant. If energy prices stay elevated and the Fed remains cautious about cutting rates, the dollar could stay supported and EM risks could intensify. The coming days will be pivotal for validating whether this is a temporary energy shock or a longer-lasting shift in global financial dynamics. What do you think—will energy-driven dollar strength persist, or will eventually softer inflation and de-escalation lift risk sentiment and curb the dollar’s gains? Share your view in the comments.
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