1.0 US Dollar (USD)
The US Dollar (USD) has reasserted its role as a global safe haven, with the Bloomberg Dollar Spot Index rising 1.8% since the Middle East conflict began on February 28. Institutional investors are currently purchasing dollars at the strongest levels seen in nearly two years as the escalating war between the US/Israel alliance and Iran drives demand for defensive assets. The DXY is poised for its second consecutive weekly gain, marking its highest levels since November 2025. Sentiment has shifted drastically from earlier in the year when many traders were positioned for dollar weakness; speculative traders are now the least bearish on the greenback since January.The primary driver for the dollar's strength is the unprecedented disruption in the oil market caused by the de facto closure of the Strait of Hormuz. Goldman Sachs (GS) has significantly raised its oil forecasts, now assuming a 21-day disruption to the strait, which has led their economists to push back the forecast for the first Federal Reserve rate cut from June to September. MUFG estimates suggest that every $10/bbl increase in oil prices adds roughly 0.2 percentage points to US inflation; with Brent crude hovering near $100/bbl, headline inflation could rise by nearly 0.8 percentage points. Consequently, traders have virtually evaporated pricing for a rate cut at next week’s FOMC meeting, now seeing only a 70% chance of any reduction this year.
US Treasuries have slumped in response, sending two-year yields to their highest levels since August at 3.75%. This selloff is being exacerbated by the prospect of increased Treasury issuance to finance a potentially prolonged and costly military campaign. On the macro data front, the US trade deficit narrowed more than expected in January to $54.5 billion as exports grew faster than imports. Nomura noted that goods exports jumped by 8.1% month-on-month, though they cautioned that the Middle East conflict scrambled supply chains and could undermine debt markets long-term. Meanwhile, US initial jobless claims remained subdued at 213,000, further reinforcing the "higher for longer" interest rate narrative.President Donald Trump has maintained a defiant tone, stating that preventing Iran from acquiring nuclear weapons is of far greater interest than the cost of oil. While the US administration is considering temporary waivers for the Jones Act to ease domestic fuel shipping, energy secretary Chris Wright acknowledged that military escorts for tankers through Hormuz are unlikely until at least the end of the month. This geopolitical stalemate suggests the dollar's risk premium will remain elevated as markets recalibrate to a regime of higher energy prices and sticky inflation.
2.0 G10 Currencies
The Euro (EUR) has been among the worst performers in the G10, with EURUSD falling to 1.1515 for its third straight daily decline. The Eurozone is particularly vulnerable due to its heavy reliance on imported energy, with European government bonds suffering steeper losses than US Treasuries this month. Although ECB President Christine Lagarde has maintained a firm line on inflation, policymakers have acknowledged that surging energy prices create significant stagflationary risks. Markets have nevertheless shifted to price roughly 30 to 35 basis points of ECB hikes this year, a notable hawkish turn from just two weeks ago. Deutsche Bank has already lowered its growth forecast for Germany this year to 1% from 1.5%.
The Japanese Yen (JPY) remains under intense pressure, with USDJPY rising beyond the 159.40 level. Japanese Finance Minister Satsuki Katayama stated that authorities are prepared to take all necessary measures on the currency, keeping in mind the impact of rising oil prices on daily life. Despite the verbal intervention, options markets and strategists suggest a high threshold for actual physical intervention given that the Yen’s slide is being driven by fundamental oil-driven dollar strength. Japan has also committed to releasing 80 million barrels of oil from reserves as part of the IEA’s coordinated 400-million-barrel discharge to stabilize markets.
Pound Sterling (GBP) fell 0.5% to 1.3344 as the energy shock clouded the Bank of England (BoE) policy outlook. Goldman Sachs has pushed its call for the next BoE rate cut to July from April, citing the inflationary impulse from the war.
In the Commodity G10 space, the Australian Dollar (AUD) and New Zealand Dollar (NZD) both slid 1% against the greenback to 0.7081 and 0.5855 respectively. While higher commodity prices usually support these currencies, the broader "risk-off" mood and fears of a global slowdown have outweighed the terms-of-trade benefits. Canada's trade deficit expanded to C$3.6 billion in January, reflecting a drop in vehicle and aircraft exports.
The Swiss Franc (CHF) has also seen its safe-haven appeal tested, with USDCHF rising 0.8% to 0.7867. The SNB remains focused on price stability, but the rapid appreciation of the dollar has forced a recalibration of cross-rate expectations. Overall, the G10 landscape is defined by "energy-importing" currencies losing ground to the dollar, while central banks are forced into more hawkish stances to combat imported inflation.
3.0 Asian Currencies
Asian Currencies are facing severe pressure as the regional petrochemical and manufacturing hubs struggle with structural feedstock deficits. The Offshore Yuan (CNH) weakened for the first time in five days, while the Onshore Yuan (CNY) fell for the third time this week as the dollar advanced. In a major policy shift, the Chinese government has instructed refiners to halt exports of transportation fuels (gasoline, diesel, and jet fuel) with immediate effect to ensure domestic supply. This has led to a sharp widening of backwardation in Singapore fuel markets and increased regional concerns regarding energy security.
The Taiwan Dollar (TWD) has found some idiosyncratic support from robust export data; February exports grew 20.6% year-on-year, marking 13 straight months of double-digit gains driven by AI-related shipments. However, officials have warned that a prolonged Middle East conflict could eventually weigh on trade. Taiwan is also facing potential power shortage risks as it holds only 11 days of LNG reserves, with Qatar supplying 30% of its requirements via the now-closed Strait of Hormuz. This poses a systemic risk to global semiconductor production, given TSMC’s massive electricity consumption.
The South Korean Won (KRW) is being weighed down by supply disruptions that have forced South Korea to announce its largest-ever oil reserve release of 22.46 million barrels. Major petrochemical producers like KPIC have cut naphtha cracker runs to 66% due to feedstock shortages.
In Southeast Asia, the Singapore Dollar (SGD) and Thai Baht (THB) have come under pressure as local governments intervene to stabilize fuel prices. The Philippines, Thailand, and Vietnam have already encouraged remote work and reduced office hours to limit energy consumption.India's LPG supply chain is reported to be under severe strain, with panic buying and restaurant closures in major cities. While an Indian government source suggested Iran might allow Indian-flagged tankers to pass through the Strait of Hormuz, an external Iranian source denied any formal deal. Regulatory factors in China, Taiwan, Malaysia, and Thailand are currently limiting some capital outflows, which may prevent a complete collapse in regional FX, but the fundamental shock of 70% of Asian naphtha supply being severed remains a critical headwind.
4.0 Trade Ideas and Fair Value Analysis
Based on the JPM Regressed Value data, several currency pairs are showing significant mispricing based on their Z-scores:
EURUSD (Long Opportunity): With a spot price of 1.1505 and a 3-month model estimate of 1.1670, the pair is undervalued by -1.4% with a Z-score of -2.26. This suggests the recent selloff has overextended beyond what fundamentals imply, offering a potential long setup if geopolitical tensions stabilize.
USDJPY (Short/Reversal Risk): The pair is trading at 159.40, significantly above its 2-year model estimate of 148.40, yielding a Z-score of 2.26. Combined with verbal intervention from Japanese Finance Minister Katayama, the risk of a sharp reversal or official intervention is high.
EURGBP (Long/Cross Idea): The pair shows a 6-month Z-score of -2.96, indicating extreme undervaluation of the Euro against the Pound. This may offer a better "buy-the-dip" opportunity than EURUSD for traders looking to avoid direct US Dollar volatility.
EURCAD (Relative Value): EURCAD carries a 3-month Z-score of -2.60. As Canada's trade deficit widens and the Euro prices in the worst of the energy shock, a mean-reversion trade in this cross could offer a high risk-reward ratio.
Summary: The market is currently pricing in a "worst-case" scenario for energy-importing nations. While the USD safe-haven bid is strong, extreme Z-scores in EUR crosses and USDJPY suggest that current levels may be reaching a point of exhaustion for professional traders.
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