The situation in the Middle East is reshaping the foreign exchange market landscape.
2026-03-03 01:18:36
On Monday (March 2), the US dollar opened stronger due to the escalating tensions in the Middle East, with gains widening at one point during the session. However, the gains have since narrowed to approximately 0.5%, a restrained reaction compared to the risk aversion triggered by tensions in the Strait of Hormuz. Currently, investors' core concerns have shifted from the duration of the conflict to whether shipping in the Strait of Hormuz can resume, and whether Trump's previous statement of "military action in about four weeks" will lead to further escalation.
The market is weighing two scenarios: if Trump manages to control the duration of military operations as expected, shipping in the Strait of Hormuz will gradually resume, and Brent crude oil prices are expected to stabilize in the $75-80/barrel range; however, if the conflict escalates and the strait remains blocked, oil prices could quickly break through $90/barrel, thereby pushing up US inflation and forcing the Federal Reserve to adjust its pace of interest rate cuts. The latter would directly impact the Eurozone, which is highly dependent on oil imports, and the euro, which has already fallen 0.3% against the dollar in early Asian trading.
Investors are closely watching the Federal Reserve meeting in just over two weeks, focusing on its risk priorities: Fed Governor Milan has repeatedly reiterated the need for a 100-basis-point rate cut (four cuts) by 2026, favoring an early implementation, based on the current weak inflationary pressures and lack of strong price drivers in the US. However, oil price volatility triggered by the Middle East situation may prompt the Fed to reassess inflation risks and the need to support the economy, adjusting the timing and magnitude of rate cuts.
Before last weekend, the prevailing market view was that with slowing inflation and a stabilizing labor market, the Federal Reserve was likely to resume interest rate cuts around June, which made the medium-term outlook for the US dollar bearish. Following the US Supreme Court's tariff ruling, the reduction in average tariff rates will further suppress prices. Businesses are reducing costs by lowering product prices and raising transportation and insurance service prices, which also explains why US inflation has not met expectations.
The current market narrative has diverged: On the one hand, the short-term surge in oil prices (ICE Brent crude opened 13.04% higher at $82.37 per barrel on March 2, with the gain narrowing to around 8.3% by the close of trading that day) has triggered concerns about a rebound in inflation, potentially leading to a temporary delay in the Fed's rate-cutting cycle. This expectation is favorable for the dollar and puts downward pressure on the euro against the dollar and some other European currencies—these economies are closer to conflict zones and are forced to purchase energy resources at high prices, putting significant pressure on their exchange rates. On the other hand, calls for rate cuts still exist within the Fed, with officials in Milan and others believing that current interest rates are "too high and restrictive." If oil prices fall and geopolitical risks ease, the rate-cutting process may still proceed as originally expected, which would again put downward pressure on the dollar.
According to Monex Group analysis, if Brent crude oil continues to remain in the $85-95/barrel range, it will create a supply shock to Japan, disrupting Sanae Takashi's economic stimulus plan. In this scenario, Japanese inflation will accelerate by 0.5 percentage points. The slowdown in Japanese inflation in January and February gave the Prime Minister some policy leeway, but sudden changes in the Middle East situation and oil price volatility could alter everything. As a result, the USD/JPY exchange rate has risen to 157.47, an increase of 0.91%, further increasing the pressure on the yen to depreciate.
Gold has become one of the main beneficiaries of the recent escalation of tensions in the Middle East. On March 2nd, COMEX gold prices briefly broke through $5409 per ounce, rising by over 3%. However, as of March 3rd, the London spot gold price fell back to $5299.13 per ounce, a decrease of $87.03 from the previous trading day, a drop of 1.62%, showing a "rise and fall" trend. In February, precious metals recorded their seventh consecutive month of gains, the longest winning streak since 1973. Coupled with geopolitical factors such as the kidnapping of the Venezuelan president and the US's tariff threats against Europe over Greenland, gold's safe-haven attributes will continue to attract capital, and there is still room for further upward movement after a short-term correction.
Currently, investors are reacting more to fluctuations in risk premiums than to fundamental factors: short-term surges and plunges in oil prices, shipping dynamics in the Strait of Hormuz, statements from Federal Reserve officials, and developments in the Middle East conflict are all key variables influencing market trends. In this environment of high volatility and uncertainty, the safe-haven value of gold and the periodic strength of the US dollar will alternately become prominent, while currencies such as the euro and the yen will continue to face dual geopolitical and energy pressures.
The market is weighing two scenarios: if Trump manages to control the duration of military operations as expected, shipping in the Strait of Hormuz will gradually resume, and Brent crude oil prices are expected to stabilize in the $75-80/barrel range; however, if the conflict escalates and the strait remains blocked, oil prices could quickly break through $90/barrel, thereby pushing up US inflation and forcing the Federal Reserve to adjust its pace of interest rate cuts. The latter would directly impact the Eurozone, which is highly dependent on oil imports, and the euro, which has already fallen 0.3% against the dollar in early Asian trading.
Investors are closely watching the Federal Reserve meeting in just over two weeks, focusing on its risk priorities: Fed Governor Milan has repeatedly reiterated the need for a 100-basis-point rate cut (four cuts) by 2026, favoring an early implementation, based on the current weak inflationary pressures and lack of strong price drivers in the US. However, oil price volatility triggered by the Middle East situation may prompt the Fed to reassess inflation risks and the need to support the economy, adjusting the timing and magnitude of rate cuts.
Before last weekend, the prevailing market view was that with slowing inflation and a stabilizing labor market, the Federal Reserve was likely to resume interest rate cuts around June, which made the medium-term outlook for the US dollar bearish. Following the US Supreme Court's tariff ruling, the reduction in average tariff rates will further suppress prices. Businesses are reducing costs by lowering product prices and raising transportation and insurance service prices, which also explains why US inflation has not met expectations.
The current market narrative has diverged: On the one hand, the short-term surge in oil prices (ICE Brent crude opened 13.04% higher at $82.37 per barrel on March 2, with the gain narrowing to around 8.3% by the close of trading that day) has triggered concerns about a rebound in inflation, potentially leading to a temporary delay in the Fed's rate-cutting cycle. This expectation is favorable for the dollar and puts downward pressure on the euro against the dollar and some other European currencies—these economies are closer to conflict zones and are forced to purchase energy resources at high prices, putting significant pressure on their exchange rates. On the other hand, calls for rate cuts still exist within the Fed, with officials in Milan and others believing that current interest rates are "too high and restrictive." If oil prices fall and geopolitical risks ease, the rate-cutting process may still proceed as originally expected, which would again put downward pressure on the dollar.
According to Monex Group analysis, if Brent crude oil continues to remain in the $85-95/barrel range, it will create a supply shock to Japan, disrupting Sanae Takashi's economic stimulus plan. In this scenario, Japanese inflation will accelerate by 0.5 percentage points. The slowdown in Japanese inflation in January and February gave the Prime Minister some policy leeway, but sudden changes in the Middle East situation and oil price volatility could alter everything. As a result, the USD/JPY exchange rate has risen to 157.47, an increase of 0.91%, further increasing the pressure on the yen to depreciate.
Gold has become one of the main beneficiaries of the recent escalation of tensions in the Middle East. On March 2nd, COMEX gold prices briefly broke through $5409 per ounce, rising by over 3%. However, as of March 3rd, the London spot gold price fell back to $5299.13 per ounce, a decrease of $87.03 from the previous trading day, a drop of 1.62%, showing a "rise and fall" trend. In February, precious metals recorded their seventh consecutive month of gains, the longest winning streak since 1973. Coupled with geopolitical factors such as the kidnapping of the Venezuelan president and the US's tariff threats against Europe over Greenland, gold's safe-haven attributes will continue to attract capital, and there is still room for further upward movement after a short-term correction.
Currently, investors are reacting more to fluctuations in risk premiums than to fundamental factors: short-term surges and plunges in oil prices, shipping dynamics in the Strait of Hormuz, statements from Federal Reserve officials, and developments in the Middle East conflict are all key variables influencing market trends. In this environment of high volatility and uncertainty, the safe-haven value of gold and the periodic strength of the US dollar will alternately become prominent, while currencies such as the euro and the yen will continue to face dual geopolitical and energy pressures.
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