How are Middle East risks & intervention contributing to a weaker USD?
The desk posits that the recent weakening of the USD is largely driven by optimistic developments in Middle Eastern geopolitics, particularly regarding potential negotiations between the US and Iran. Per the full note from MUFG EMEA, this optimism has buoyed global risk sentiment, contributing to a rally in equity markets and a decline in the dollar's value. Additionally, strong earnings growth from US corporates has not translated into dollar strength, as the Federal Reserve's current stance suggests a hold on interest rates. This aligns with our consensus target of 1.075 for the EUR/USD, reflecting a range of expectations from various firms.
What the desk is arguing
MUFG analysts Lee Hardman and Seiko Kataoka Fisher argue that heightened risks emanating from the Middle East are contributing to the recent depreciation of the USD. This trend is compounded by speculation surrounding the potential effectiveness of Japanese government intervention in stabilizing the JPY, which has been under pressure against the dollar.
The analysts provide evidence that persistent geopolitical tensions have shifted investor sentiment, favoring currencies seen as safe havens. Furthermore, they posit that if Japan does proceed with intervention, while it may provide temporary relief for the JPY, it is critical for the broader market sentiment to stabilize to have lasting effects on USD performance.
Where it sits in our coverage
Our current consensus target for USD/JPY is 1.075, resting within a range of 1.04 to 1.12. This outlook aligns with MUFG's perspective on potential vulnerabilities facing the USD due to shifting risk landscapes, albeit with varying interpretations of the intervention's immediate effectiveness.
- Barclays: Dec-26 target at 1.10.
- JPMorgan: Dec-26 target at 1.10.
- Morgan Stanley: Dec-26 target at 1.08.
How other firms see it
In general, sentiment appears divided among major firms regarding USD performance amidst geopolitical tensions. Some analysts are more cautious, suggesting that external factors may play a more prominent role than domestic interventions.
- Goldman Sachs: Aligned, citing stable fundamentals supporting the JPY recovery.
- BofA: Contrary, warning of potential for further USD strength against JPY in the absence of effective intervention.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Middle East risks are weakening the USD.
- 02Japanese intervention may not fully reverse JPY depreciation.
- 03Investor sentiment is crucial in determining USD-JPY dynamics.
Market implications
A weaker USD can lead to stronger Japanese exports, potentially stabilizing risk markets. However, the effectiveness of Japanese intervention could be limited, leading to ongoing volatility if geopolitical situations worsen.
Risks to this view
Escalation of conflicts in the Middle East and ineffective intervention measures pose significant risks for USD and JPY valuations. Additionally, divergence in monetary policy between the Fed and BOJ could further complicate the USD-JPY trajectory.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday 8th May 2026, and joining Lee to pose some questions on the financial market themes for the week ahead is Seiko Kataoka-Fisher, Director from Japanese customer sales for EMEA in London. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi Lee.
Hi Seiko. We've seen the dollar weaken over the past week. What has been behind the alleged selloff?
Yeah, like you say, we've seen some further weakness in the dollar over the past week. And to us, the main trigger has been the renewed optimism that the US and Iran are moving closer towards a deal to try and end the war in the Middle East and to kind of gradually reopen the Strait of Hormuz over a 30-day period. At this point, there's still no kind of deal finalized, but we are waiting to see whether Iran will accept the terms of this deal, which has been proposed by the US.
The risk still is that, like you say, Iran may feel that it's more in their interest to prolong these negotiations. Obviously, the longer the Strait of Hormuz remains closed, the more the risks are that we could see disruption in energy markets and a bigger hit to the global economy. And that ultimately could mean that Iran is in a better position to get better terms in a deal with the US.
So that's still the risk, but the market is obviously very hopeful and optimistic that a deal can be reached sooner. And that improvement in risk sentiment has encouraged global equity markets to hit fresh record highs over the past week. Obviously, on top of the better news from the Middle East is also the strong earnings growth that we've seen for US corporates in Q1, with another quarter of double-digit annual earnings growth helping to boost investor sentiment.
And this improvement that we're seeing in global investor risk sentiment, like I say, that has been a key factor which has contributed to the weaker dollar. On the other side, we've seen the high beta G10 commodity currencies outperforming at the dollar's expense. The other thing that we've been watching as well today was the release of the latest payrolls data from the US.
That did provide some further reassuring news that the labor market in the US does appear to be showing tentative signs of improving at the start of this year. If we look at private employment growth in the first four months of this year, it's averaged around 90,000 per month, which is definitely a pickup from what we saw in the final four months of last year when private employment growth averaged about 35,000 per month. So it certainly should give the Fed more confidence that the labor market is stabilizing and there's not as much need now for them to lower rates further in the near term.
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