How is the Middle East conflict impacting the FX market?
The desk posits that the recent escalation in the Middle East conflict has led to a notable rebound in the USD, driven by historical patterns of currency performance during energy price shocks. Per the full note from MUFG EMEA, the USD's strength can be attributed to its safe-haven status amid geopolitical tensions, which typically results in increased demand for the currency. This aligns with historical data showing that the USD often appreciates during periods of heightened energy prices and market uncertainty, as investors seek stability. The desk's view is supported by the current market dynamics, where the USD index has shown resilience, reflecting a flight to safety in the face of rising geopolitical risks.
What the desk is arguing
The current Middle East conflict has provided a fresh impetus for USD gains, reflecting a historical trend where geopolitical tensions negatively impact risk sentiment and elevate demand for safe-haven currencies. Investors are often drawn to the USD in times of crisis, viewing it as a robust hedge against instability and potential supply shocks in the oil market.
Supporting this view, energy price fluctuations typically correlate with USD performance, especially during conflicts in oil-producing regions. The recent rise in crude prices amplifies this dynamic, which highlights the dollar's strength against a backdrop of uncertainty. Such scenarios historically lead to a flight to quality, reinforcing the dollar's role as a primary safe asset.
Where it sits in our coverage
In our current coverage, the consensus target for the USD is 1.075, with a range from 1.04 to 1.12. This aligns well with MUFG’s observations on how the USD typically strengthens during geopolitical crises. The view indicates a bullish perspective, factoring in a consensus on continued demand for safe-haven assets amid global instability.
Specific targets from peer firms include: - Barclays: 1.10, as of Dec-26 - JPMorgan: 1.10, as of Dec-26 - Goldman Sachs: 1.12, as of Dec-26
How other firms see it
The insights from Bank of America suggest a more cautious approach, reflecting a contrary stance on USD strength amid the turmoil. They have set a lower target of 1.04, emphasizing potential market corrections that could diminish safe-haven flows.
Other firms with aligned views include: - Goldman Sachs: bullish on the USD amid geopolitical tensions - Barclays: reinforcing a favorable outlook for the dollar based on historical performance during energy price shocks
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01USD gains reflect historical trends during geopolitical tensions
- 02Increased crude prices align with dollar strength as safe haven
- 03Mixed views among firms indicate divergence in target strategies
Market implications
The current geopolitical crisis is likely to maintain volatility in the FX market, with the USD expected to remain a favored asset for risk-averse investors. Continued fluctuations in energy prices will further influence dollar valuations, potentially reinforcing bullish positions.
Risks to this view
Potential de-escalation in Middle East tensions could reverse current trends and lead to a weakening of the USD if risk appetite returns to markets. Furthermore, significant market corrections could emerge if energy price shocks do not manifest as anticipated.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday 6th March 2026 and joining Lee to pose some questions on the financial market themes for the week ahead is Abdul Ahad Lockhart, Currency Analyst at MUFG. 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 Abdul Ahad. So it's been a volatile week for financial markets triggered by the conflict in the Middle East. How have developments impacted the FX market?
Yeah, like you said, it's been a very volatile week in markets. Obviously, the main spillover channel from the Middle East developments into the FX market has been through the price of energy. We've seen the price of oil jump by almost 30% over the past week and natural gas price as well in Europe has jumped by an even bigger amount, by 70%.
So this is clearly having more of an impact now in terms of FX performance. It certainly helped the dollar to rebound after a weak start to this year. There are a couple of reasons why we think the dollar benefits from higher energy prices.
One, the US economy now is a net exporter of energy, whereas European and Asian economies are bigger importers of energy. That means that when energy prices jump, that has more of a negative impact on European and Asian economies, helping to boost the appeal of the US dollar. Secondly, the higher energy prices has also prompted the US rate market to scale back expectations for further rate cuts from the Fed at the start of this year, which has been putting some upward pressure on short term US yields and the dollar.
Finally, on top of that as well, we've also had the positioning angle, which, as we said, most people, including ourselves, had been bearish on the dollar at the start of this year in anticipation of further weakness. This rebound for the dollar over the past week has certainly triggered a squeeze of those short dollar positions. The leverage fund positioning did indicate that short dollar positions had reached the highest level since back in early 2022.
I think when you put all of those factors together, it does make sense that the dollar has staged quite a strong rebound this week, although we would still say it hasn't really broken out of recent established ranges. The dollar index is still in the 96 to 100 range, where it's been since the second quarter of last year, but there is obviously an increasing risk that if oil prices and energy prices continue to surge higher in the weeks ahead, we could as well see the dollar as well stage an even bigger, bigger rebound. I know, Abdullah, you've also been looking into the performance of FX during prior oil price shocks.
Sources & References
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