The United States and Israel launched military strikes on Iran over the weekend, killing Supreme Leader Ali Khamenei, and the attacks extended into Monday after Iran hit back, with blasts reported across Israel, the UAE, Qatar, Bahrain and Kuwait.
U.S. President Donald Trump said more strikes would continue “for as long as necessary,” underscoring the risk of a prolonged conflict and deepening market anxiety.
“Developments this weekend seem clearly dollar positive and we identify three channels at work here. The first is U.S. energy independence and the energy dependence of Europe and Asia,” said analysts at ING, in a note.
“The second channel is what this all means for Federal Reserve policy. Notably, Fed Fund futures contract sold off 3-4 ticks in Asia on the view that the Fed might not be able to cut rates twice this year,” ING added.
“The third and related channel is that higher energy prices and questions over the Fed’s ability to cut rates will stop and potentially reverse portfolio flows into emerging markets.”
In Europe, EUR/USD traded 0.6% lower to 1.1741, with the single currency under pressure as the conflict in the Middle East is set to cause energy prices in the region to rise.
“Higher energy prices will see investors re-appraise their view of a renaissance in European industry. That said, the global economy is in a much better position than it was when energy prices spiked in March 2022 and there is now more fiscal support than there was back then,” said ING.
“Unless there is some early de-escalation, EUR/USD can easily get pushed back to the 1.1575/1650 region, with outside risk to the 1.1575/1600 region. Investors have been right to question the safe haven status of the dollar this year, but given the nature of this shock (energy), it will be the dollar that benefits the most.”
GBP/USD dropped 0.8% to 1.3375, with sterling under pressure, while EUR/CHF fell 0.3% to 0.9055 as the safe-haven Swiss franc soared to its strongest in more than a decade versus the euro.
“The Swiss National Bank will not like it, but expect the focus now to switch to negative interest rates again in Switzerland. The CHF OIS market shows the 1m OIS priced at -12bp in one year’s time. That could well be priced to -25bp as buying pressure remains on the franc,” ING added.