What do rising geopolitical risks and crude moves mean for the USD?

Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halperni, Head of Research, Global Markets, EMEA, and International Securities. It's Friday 13th of March 2026, and joining Derek to pose some questions on the financial market themes for the week ahead is Andrew Mottola, Director in FX Corporate Risk Solutions in New York. 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 Andrew, how are you?

Hey Derek, I'm doing well, how are you? Yeah, not too bad, not too bad. Good of you to join for this week's podcast.

Thank you very much. Yeah, it's great to be speaking with you today. There is certainly plenty to discuss.

Maybe a good place for us to start this week is in the Middle East. There's obviously a high level of uncertainty around how the conflict in Iran unfolds. Can you take us through the short term scenarios that you've identified and what you expect the impact to be both for crude oil and the US dollar?

We thought this was a good exercise to not necessarily predict precisely what's going to happen, which of course is impossible, but just to give clients a gauge of the type of FX moves that potentially could unfold based on certain plausible scenarios and what that does to crude oil prices. We've ran regression analysis work to extrapolate a standard FX move, if you want to call it that, where we've looked at moves higher in crude oil prices. Based on post-shale data, so from about 2013, 14, a 10% jump in crude oil prices equates to about a drop of 0.7% in euro-dollar.

Euro is actually the currency within the G10 space that performs worst. If you take crude oil prices today, we're up about 40% from pre-conflict levels. That would imply a drop in euro-dollar of 2.8%, to be precise.

If you look at the markets today as we speak now, Andrew, euro-dollar is down about 3%. So I think the first thing to say is that just based on the oil-US-dollar standard relationship in the post-shale, US-shale era, the dollar performance has been in or around what you would expect. Now, obviously, there's been swings, et cetera, et cetera, but again, as we sit here, that's the conclusion.

So that's the first thing to say. I think then going to scenarios, we've kind of laid out three scenarios. The best case scenario, obviously, is de-escalation pretty quickly.

And when I say pretty quickly, we're now two weeks into the conflict. Pretty quick would be another week, 10 days, max two weeks, and then you get a cessation to the hostilities and some form of de-escalation. And in that scenario, we think, firstly, a kind of risk premium in crude oil will still be embedded into the price for some considerable period of time, certainly a number of months, maybe many months.

And if we go with a range of $75 to $80 for Brent, with a midpoint of about $80, that would imply, we think, US dollar potentially being in a range of minus 1.5%, 2%, plus 1.5%. Maybe a euro-dollar range of 1.15 to 1.18. So in a de-escalation scenario, based on where we are today, we could see certainly some potential retracement of the dollar strength, but certainly not all of it.

And that's the best case scenario. Scenario two is maybe we're already kind of moving into scenario two, but scenario two relative to one is basically investors saying, well, hang on a second. This isn't going to be a kind of a quick number of weeks type conflict.

This could extend further. And investors start to push back the timing of the end of the conflict, and that obviously has consequences for crude oil supply expectations. And therefore, we go into a kind of a wider crude oil price range, and we've put that at $85 to $120 for Brent.

And again, taking a kind of a rough midpoint of that and extrapolating that for the US dollar performance, that gives us potentially DXY of 4%, but a range of 4% to flat, and we have a euro-dollar range of 1.12 to 1.16. And then scenario three, obviously, is the worst scenario. This is where scenario two drags, and scenario two maybe lasts six weeks, seven weeks after the beginning of the conflict.

Scenario three is more measured in months, maybe one to three months. There's no let-up. Iran starts to attack more aggressively production facilities, and as more production is knocked out, that again results in investors reappraising the supply disruption in the energy markets, and we get a further lift in crude oil prices.

And the range in scenario three that we have is $120 per barrel to $160, and in that scenario, we see the potential for euro-dollar to drop below 1.10. We have a low point of 1.07 and a range for euro-dollar of 1.07 to 1.13, with the potential of a broader dollar move of something between 3% and 7.5%, 8% stronger for the dollar. With scenario three, the only thing I would say is that in terms of the G10 FX performance, scenario three, the risks of a much bigger drawdown in equities is a lot higher, because crude oil prices in that range, $120 to $160, investors are going to be pricing in much higher levels of risk in relation to recession.

Surely in that scenario, we're going to get a bigger drawdown, U.S. equities in particular, which have been remarkably resilient so far. And if we were to get, say, a 15%, 20% drop in equities, that then does have implications for front-end rates. There is a scenario where central banks are more focused on inflation initially, certainly in scenario one, scenario two, but in scenario three, if we get a big drawdown in equities, which is a big kind of deflationary, disinflationary hit, it obviously offsets some of the concerns in relation to the energy price surge, and certainly then the prospects of rates being lower than expected is likely to result in front-end yields coming down, from what would be, of course, higher levels, because we've gone through scenario one, scenario two, into scenario three.

And then in scenario three, the prospect of maybe certainly the Swiss franc outperforming, or G10 outperforming, maybe even Euro outperforming in the Japanese yen, if rates in the U.S. are coming down at the front end of the curve. So the mix and performance within G10 starts to change a little bit, I think, once the scenario prolongs and we go into a more severe scenario three type situation. Thanks, Derek.

Yeah, understanding things will likely continue to be driven by those headlines and how things unfold. And I think it shifts gears just a little bit to monetary policy, because I'm sure you've noticed we have a very busy week ahead with eight G10 central bank meetings in the next seven days. So in light of all the recent events, how do you expect the key central banks to respond next week?

And what are maybe a few of the takeaways you're looking for at those meetings? Yeah, it's a tricky one going into these meetings. I think the safest bet in terms of next week that makes most sense, given we're in such a high level of uncertainty, is the message from central banks would be kind of wait and see.

They certainly won't want to give any conclusive messaging to the markets in relation to monetary policy. And in that sense, I think the communications would be quite careful. Now, having said that, of course, we've just come from the biggest global inflation shock post-COVID, post the invasion of Ukraine by Russia since the late 1970s, early 80s.

And I think also, while they'll be quite careful in sending any strong messages and they'll want to kind of have some time to assess the energy price shock, I think certainly in Europe in particular, but also I think from the Fed, that they won't have the same appetite for looking through an energy price shock if it was to become sustained. So I think like everything that we've been discussing over the last two weeks, it's all about the extent of the time that this takes. And as the scenarios that I went through, each one is longer in time and it becomes a bigger issue in terms of energy supply.

And therefore, there will certainly be, I guess, communications next week that if energy prices stay high for long, then the risks of this feeding into food inflation and into certain services becomes a higher risk and a response may be needed. So I think comments like that, I think, would be understandable given where we've come from. But they won't want to kind of be explicit in any way and they'll say, wait and see.

And hopefully things can de-escalate. I think obviously for all of, well, seven of those eight central banks, we want to get a policy change. The one where we could get a policy change is from the RBA.

They've already raised rates. The deputy governor spoke about inflation being toxic and being higher than what the RBA was expecting. And given, you know, from a terms of trade perspective, Australia is a natural gas, so it doesn't have the negative terms of trade shock that Europe has, for example.

And therefore, they could be a bit more confident in the need for raising rates. So it's priced at about 16, 17 basis points at the moment. So it's not fully priced, but it's more than 50 percent price.

So it wouldn't be a huge surprise if they do go on Tuesday. And that really is the only one of the eight next week that I think will take any steps. The BOJ is where pricing is, you know, there's nearly 50 basis points of hikes priced, but that's quite similar to where we were before the conflict began with the BOJ expected to raise rates twice this year.

Again, Governor Oueda probably repeats the same message that if things unfold as expected, we will be in a position to raise rates. But obviously, how things unfold is a lot less clear now because of the crisis. So he, too, will be quite cautious, I think, in terms of messaging.

Yeah, thanks, Derek. And on the BOJ and dollar-yen, you know, as we record, we're sitting just a hair below the 160 level. Can you just expand a little bit on what your baseline view for the pair is from here?

And maybe where would you expect potential intervention to become a focus again? Yeah, definitely. You know, it's been back in focus, I guess, in particular today because dollar-yen went through the level in which the Fed checked rates on the 23rd of January, which prompted a seven-big-figure drop in dollar-yen over a three-day trading period.

And we've also gone through today the high previously set on the 14th of January, which was 159.45. Yeah, I think it's a lot more difficult in this environment to justify intervention. This is a dollar move, first and foremost.

You know, for example, euro-yen is actually below the levels from January when the Fed checked rates. Sterling-yen is lower as well. So the yen is actually gained against certain currencies.

Aussie, it's weakened. CAD, it's weakened. Obviously, the terms of trade, currencies that are benefiting to some degree from the increase in energy prices.

So it's not as compelling an argument that this is yen speculation. It doesn't look like that. The moves have been orderly.

Dollar-yen is up 2% since the conflict began. So 2% in two weeks, definitely not problematic price action. So I think it's more likely than not that next week there's a high chance I think we break 160.

Could be maybe on the day of the meeting if Governor Wade is more cautious perhaps. And then once we get through 160, then it's a matter of what's up there, what's up there in terms of stops. Do we get option-related volatility that sees three, four, five big figure move very quickly?

In that context, then, of course, the MOF has the justification in terms of potential intervention. One interesting caveat on all of this is, of course, if you remember back to before the conflict and the whole January sell-off of the dollar, dollar debasement fears, the Trump administration wanting a weaker dollar. I actually think there's a lot of credibility in that view and that idea.

And with the dollar strengthening now on the back of what's happening, you know, maybe the Trump administration are not particularly happy with this. And if dollar-yen does break above the 160 level and we get a move and the MOF want to intervene, is there a possibility that there's joint intervention? Maybe the Treasury Department will want to send a signal to the markets that they don't want a stronger dollar.

So it's a risk. And I think it's an interesting development if that was to take place, because that would be a very good way of the Trump administration signaling, we don't want this, we don't want a stronger dollar, which I think is something that is quite fundamental in certain members of the Trump administration. Steve Merrin is the most obvious example.

Well, thanks, Derek. Really appreciate your insights, as always, and we look forward to hearing from you again soon. Indeed.

Thank you, Andrew, and have a good weekend. Thank you for listening to this MUFG Global Markets podcast. Rate, review and subscribe.

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