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EUR/USD just sliced below 1.16 to levels not seen since November. The yen is back in intervention territory. The Swiss National Bank is talking about negative rates again. And all of it traces back to one thing: a Strait that nobody can cross.
Two trading sessions. That is all it took for the Iran conflict to rearrange the entire G10 currency map. The dollar, which spent most of 2025 and early 2026 leaking value — down roughly 9% in trade-weighted terms from its January 2025 peak — has snapped back with force. The DXY index surged past 98.5 on Monday and broke through 99 on Tuesday to hit 99.39, its strongest level in over a month. The catalyst is not complicated. The Strait of Hormuz is closed. Major insurers have pulled coverage for tankers. Brent crude hit $79.40 a barrel Tuesday, its highest since December. And every currency that belongs to a country importing oil just became structurally less attractive.
What makes this move unusual is not its direction. It is the speed at which the market abandoned the most popular trade of the past six months.
The Euro Long Just Blew Up
EUR/USD touched 1.1528 intraday on Tuesday — breaching the 200-day moving average at 1.1580 and printing its lowest level since early December. That is a roughly three-cent drop from the 1.18 handle where it was trading barely two weeks ago, before the first US-Israeli strikes on Iran rewired the geopolitical calculus. The pair stabilised near 1.1593 by Wednesday’s European open, but nobody is calling a bottom.
The problem for the euro is mechanical and brutal. The eurozone is a net energy importer. Every $10 rise in oil prices subtracts approximately 0.3% from eurozone GDP and adds around half a percentage point to headline inflation, according to ING Research estimates. That is a stagflationary impulse the ECB cannot offset without making things worse. Cut rates and you let inflation run. Hold and you choke an economy that never fully recovered from the 2022 energy shock — the last time Europe’s energy security was tested this severely.
Positioning makes it worse. CFTC data showed asset managers and large speculators holding near-record euro longs heading into the conflict. That crowded trade is now unwinding, and the exits are not orderly. ING’s FX strategy team wrote Monday that EUR/USD can “easily get pushed back to the 1.1575/1650 region, with outside risk to 1.1575/1600” if there is no early de-escalation. Goldman Sachs still holds a $1.25 year-end target, but JPMorgan’s Meera Chandan sees near-term consolidation at $1.16 to $1.18, with a hard floor at $1.15.
If DXY clears 100 — and it is 60 basis points away — the path opens to 102-103. That would put EUR/USD below 1.15 and start the sort of parity conversations European Business Magazine was already running by Tuesday.
The Yen Is Back in the Danger Zone
USD/JPY surged toward 158 on Tuesday, touching 157.67 and testing a multi-decade ceiling that both the Bank of Japan and Japan’s Ministry of Finance have spent the past year warning markets not to approach. Finance Minister Satsuki Katayama issued intervention warnings on two consecutive days when the pair climbed toward this level in January, briefly knocking it below 156. This time, the yen has an additional problem: Japan imports virtually all of its oil.
Standard Chartered’s Steve Englander put it simply on Monday: “It’s mostly about exposure to oil.” The yen, normally a safe-haven currency during geopolitical stress, is being sold because the energy shock makes Japan’s external position worse, not better. If USD/JPY clears 160 — the threshold where the BoJ spent roughly $100 billion in direct intervention during summer 2024 — a new chapter in the BoJ’s exchange rate management begins, and it will not be a comfortable one. JPMorgan and BNP Paribas both see the pair reaching 160 or beyond by year-end.
The Bank of Japan, which raised rates to 0.75% but has signalled no urgency for more, faces the same stagflationary dilemma as the ECB. Hike to defend the yen and you risk choking domestic demand. Hold and you watch imported inflation eat away at household purchasing power. Governor Ueda’s preference, per his December comments, has been to wait and watch. The market is not in a waiting mood.
The Swiss Are Talking Negative Rates. Again.
If there is one signal that the forex market has shifted into crisis mode, it is this: the Swiss franc soared to its strongest level against the euro in years, with EUR/CHF dropping to 0.9113 on Monday. The Swiss National Bank responded by saying it was “more willing” to intervene in currency markets. The CHF overnight indexed swap market is now pricing the one-month rate at negative 12 basis points in a year’s time. ING expects that could widen to negative 25 basis points if buying pressure on the franc persists.
Negative Swiss rates. In March 2026. The last time the SNB went there was during the euro crisis and the early pandemic. The fact that traders are even discussing it tells you the Hormuz disruption is being priced as something with duration, not a weekend scare that fades by Thursday.
The Dollar’s Three Tailwinds
ING identified three channels driving dollar strength, and none of them are going away soon. The first is US energy independence. America produces more oil than any country on Earth. A supply disruption in the Persian Gulf hurts the US far less than it hurts Europe or Japan. That asymmetry is the single most powerful force in the forex market right now.
The second is Fed repricing. Before the strikes, the market had a rate cut fully priced for July and three 25-basis-point reductions by year-end. That has shifted to September for the first cut and only two reductions total. Goldman Sachs projects US headline CPI could reach 2.7% by May under its baseline scenario, or 3% if the oil shock persists — a level that would make any near-term easing politically and economically difficult for the Fed. The December core PCE print already came in at 3%, and Goldman’s preliminary estimate for January suggests it may have edged higher still.
The third is plain positioning. Markets were heavily short the dollar and long everything else — EM currencies, the euro, European equities, commodities. Marc Chandler at Bannockburn Global Forex summed up the sentiment: “The endgame is unclear.” When the endgame is unclear, you hold the reserve currency.
Sterling and the Aussie: Collateral Damage
GBP/USD dropped to 1.3300 on Tuesday, its lowest in three months, extending a decline that began with the UK’s deteriorating labour market. The UK, like the eurozone, imports most of its energy. Rising oil and gas prices feed directly into household costs and Bank of England rate calculations. The market is shifting toward a “higher for longer” BoE stance, which in theory should support sterling but in practice just compounds the stagflation risk. The pound was already fragile before this.
The Australian dollar was the weakest major currency in Wednesday’s Asian session despite releasing GDP data that beat expectations — 0.8% quarterly growth versus the 0.6% consensus. The market did not care. Risk-off overwhelms data when a war is repricing global energy costs. AUD/JPY, the classic barometer of risk appetite in FX, is in freefall.
Gold Crashed. That Is the Strangest Part.
Here is the part that should bother you if you run any kind of cross-asset framework. Gold, which briefly touched $5,400 last week, suffered a sharp liquidation on Tuesday, dropping below $5,000 before clawing back above $5,100. In a textbook geopolitical crisis, gold should rally. It did not. The dollar’s gravitational pull — amplified by surging Treasury yields and the repricing of Fed easing — was strong enough to overcome one of the most instinctive trades in finance.
Treasury yields are the mechanism. The 10-year surged to 4.11% as energy-driven inflation fears collided with the reality that the Fed cannot cut into an oil shock. Higher yields mean a higher opportunity cost for holding gold, and when the dollar rallies simultaneously, the squeeze is ferocious. This is the same dynamic that crushed gold in the early months of the 2022 Russia-Ukraine energy crisis before it recovered. Whether the parallel holds depends entirely on one variable: how long the Strait stays closed.
The Paradox Nobody Will Say Out Loud
The United States launched the strikes that created this crisis. Its currency is the biggest beneficiary. The countries being punished hardest in FX markets — the eurozone, Japan, the UK, Australia — are American allies. The countries with energy surpluses that might see currency support — Saudi Arabia, the UAE, Kuwait — are the ones Iran is targeting with retaliatory strikes on US bases in the Gulf.
Trump offered tanker insurance and naval escorts through the Strait on Tuesday, and the S&P 500 recovered about 1.5% from its intraday low on the headline. But that stabilisation has not extended to Asian or European markets. The KOSPI dropped 12% on Wednesday. Dubai’s benchmark fell nearly 5%. The war is, in currency terms, a dollar-positive event. It may remain so for weeks or months. Goldman’s structural call for a weaker dollar by year-end requires the conflict to end quickly and oil to retreat below $70. Neither is a given.
The 2022 playbook is repeating: energy shock, inflation surge, ECB paralysis, euro decline. The only question is whether this chapter ends faster — or worse.
