The surge in oil prices triggered by the closure of the Strait of Hormuz has brought the term "stagflation" back onto traders' screens, signaling a bullish turn for the U.S. dollar. JPMorgan Chase has executed two shifts in position in less than three weeks: moving from bearish to neutral on March 2, and now turning tactically bullish, fully abandoning its year-long bearish stance on the greenback.
According to trading desk analysis, the core logic behind this shift was articulated plainly by JPMorgan foreign exchange strategist Meera Chandan in a recent report: the move is not based on predictions about the direction of geopolitical conflict, but rather represents a form of "cautious insurance." Should energy shocks and stagflationary pressures persist, and if both stocks and bonds face simultaneous pressure, the U.S. dollar stands out as the most effective portfolio hedge. Concurrently, if market sentiment continues to deteriorate, the narrative of "American exceptionalism" could re-emerge, providing further support for the dollar.
The transmission path of this energy shock reveals a clear divide in foreign exchange markets between importers and exporters. Currencies of energy exporters, such as the U.S. dollar, Australian dollar, Canadian dollar, and Norwegian krone, are expected to benefit. The eurozone currencies are experiencing a more significant empirical impact than Asian currencies, though the Japanese yen typically shows the most pronounced absolute decline. The eurozone's terms of trade have collapsed, natural gas inventories are below seasonal norms, and the fair value for EUR/USD has been pushed down to a range of 1.10-1.13, its lowest level since July 2025.
However, JPMorgan has clearly defined the boundaries of this shift: it is a tactical adjustment, not a permanent change in stance. Medium-term forecasts for most currencies remain unchanged, but the degree of risk is now skewed more heavily towards U.S. dollar appreciation. The newly initiated macro portfolio trade involves buying an equally weighted basket of the U.S. dollar against the euro, Swedish krona, British pound, and New Zealand dollar.
The rationale for turning bullish on the dollar is rooted in defensive需求. The bank outlined four distinct scenarios with different outcomes.
When news of the Strait of Hormuz closure emerged on March 2, JPMorgan had already shifted from bearish to neutral. This further step is driven by the core idea that stagflation pressures cause both bonds and stocks to lose their hedging utility, a void filled by the U.S. dollar.
Historical data supports this: periods when risk-parity portfolios underperform coincide strongly with U.S. dollar strength. JPMorgan's quantitative TEAM model currently ranks the U.S. dollar as the highest-scoring currency—signals for real yields, nominal yields, and relative equity momentum have all flipped positive, with only valuation remaining a weak point. Additionally, the U.S. dollar's correlation is currently around 60, in the historically high range, which provides discounting space for subsequent de-correlation trades.
JPMorgan outlined four scenarios in its report:
Scenario 1: Extreme Escalation (Low Probability) - Geopolitical situation deteriorates severely, Azerbaijani gas supplies are disrupted, and full-blown market避险情绪 erupts. The U.S. dollar strengthens significantly, with the DXY index rising 4.6% to 103.7, and EUR/USD falling to 1.10. Currencies of energy exporters (CAD, NOK) outperform, while currencies of highly energy-dependent nations (SEK, GBP) come under significant pressure. Energy prices surge sharply, with TTF gas exceeding €80/MWh and Brent crude oil rising to $100–120+ per barrel.
Scenario 2: Hormuz Disruption (Medium Probability) - Shipping through the Strait of Hormuz is suspended until the end of summer. Market direction aligns with the Extreme Escalation scenario, but the magnitude of the shock is more contained. The U.S. dollar strengthens, with DXY rising 3.4% to 102.6, and EUR/USD holding in a 1.10–1.13 range. TTF rises to €60–70/MWh, and Brent crude climbs to $100–120 per barrel.
Scenario 3: Partial Normalization (High Probability) - Shipping partially resumes within 3 weeks, with traffic recovering to 70% capacity, representing the current market baseline expectation. The U.S. dollar weakens, with DXY falling 1.1% to 98.1, and EUR/USD recovering to 1.17. Currencies of energy importers (GBP, EUR, JPY) strengthen, while the Canadian dollar reverts to its funding currency characteristics. TTF falls back to €40–45/MWh, and Brent crude retreats to $70–80 per barrel.
Scenario 4: Full Normalization (Medium Probability) - Shipping fully resumes, sanctions on Iran are lifted, and risk premiums completely dissipate. Market direction aligns with the Partial Normalization scenario but with greater force. The U.S. dollar weakens significantly, with DXY falling 3.5% to 95.8, and EUR/USD rising to 1.20. TTF falls back to €30/MWh, and Brent crude drops to the low $60s per barrel, returning to recent lows.
The euro faces quantitative pressures. The collapse in the eurozone's goods terms of trade, sub-seasonal natural gas inventories, and a significant deterioration in real interest rates have pushed the EUR/USD fair value down to the 1.10-1.13 range. While nominal interest rates favor the euro, this is insufficient to offset the real rate deterioration. The Q2 target was lowered to 1.17, with the year-end target unchanged at 1.20, but JPMorgan explicitly stated this year-end target "reflects a lack of visibility, not confidence," with clear downside risks.
The situation for the British pound is more complex. JPMorgan switched directly from a tactical bullish view to a bearish one, slashing the GBP/USD target from 1.41 to 1.34. The reason is a dual overlay: the UK's manufacturing PMI growth surveys show a larger impact than most G10 economies; simultaneously, stagflation-driven rises in UK government bond yields will not support the pound, as high rates in a stagflation environment deter capital rather than attract it. Local elections on May 7 pose an additional political tail risk. The pound is already stronger than its energy dependency would imply, suggesting room for a catch-down move.
The assessment of the Japanese yen is among the most certain in the entire report—maintaining a bearish view, with USD/JPY targets of 158 for Q2 and 164 for year-end. Rising energy prices directly worsen Japan's trade account, the primary transmission channel. More subtly: because this round of USD/JPY strength is largely driven by broad-based U.S. dollar appreciation, the justification for intervention by Japan's Ministry of Finance is reduced—intervening against a unilaterally weak yen is logical, but intervening against broad dollar strength is harder to justify, thus raising the intervention threshold compared to prior expectations.
The Norwegian krone is the G10 currency that benefits most from the energy shock. Improving terms of trade, a hawkish Norges Bank, and a break below the multi-year range for EUR/NOK lead JPMorgan to believe the breakout can be sustained. FX purchases by Norges Bank have turned negative this year, providing structural support. JPMorgan's quant model ranks NOK's inflation momentum as the second strongest in the G10, directly driving the hawkish stance.
The logic for the Australian dollar is more nuanced. The AUD/USD target for Q2 remains unchanged at 0.73. The core point is that the Aussie's beta to commodities has recovered over the past year, making the commodity terms-of-trade effect "effective" again—something that was not the case during the mid-2022 to mid-2025 period when distorted stock-bond correlations pressured commodity-sensitive currencies. Domestic inflation in Australia remains above the RBA's target, with markets pricing in a 70% probability of a rate hike.
China is one of the major economies least affected by this global energy shock. Relatively lower dependence on oil and gas imports, a diversified domestic power structure, and light foreign positioning in Chinese assets result in less capital outflow pressure on the renminbi. The USD/CNY target for Q2 remains unchanged at 6.85. Historical analysis of oil price upcycles and the renminbi's trade-weighted exchange rate also shows that CNY typically does not depreciate significantly alongside energy price increases.
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