USD: Conflict-driven support persists on energy risks – MUFG

MUFG’s Senior Currency Analyst Lloyd Chan notes that the US–Iran conflict and threats to Middle Eastern energy infrastructure are keeping energy risk premia elevated, supporting the Dollar. Higher Oil prices and risk‑off sentiment are seen feeding into US inflation and sustaining higher US rates for longer, reinforcing headwinds for risk‑sensitive assets globally.

US currency benefits from risk premia

"The duration of the US–Iran conflict and the severity of damage to Middle Eastern energy infrastructure remain key variables for global markets. Recent developments increasingly point to a potentially more protracted conflict, extending beyond the 4–5 week timeframe previously signalled by President Trump."

"A protracted conflict increases the likelihood that energy risk premia remain in markets for longer. Reports suggesting that Iran may be considering a tolling mechanism at Hormuz further raise the prospect that disruptions to global energy flows could persist even beyond the end of active hostilities, keeping uncertainty around energy supply availability elevated."

"For markets, the conflict remains broadly USD supportive. Risk off sentiment, combined with the risk that higher energy prices could feed into US inflation and keep US rates higher for longer, continues to underpin the dollar and reinforces headwinds for risk sensitive assets."

"Key developments to monitor include 1) any conflict escalation including US ground attacks on Kharg Island or in areas near Hormuz, 2) the implementation of a tolling system in Hormuz by Iran, which would create uncertainty around energy supply availability, 3) the spillover effects of higher energy prices on US and Asia inflation, including second-order effects via higher transportation and food inflation, and 4) any credible signs of conflict de-escalation."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)