We thought it would be a good idea to recap how the escalation into a full-scale US, Israel, Iran war has made this week into a volatile session for the USD.

The first-order impact was a flight to safety into the USD driven by fears of a “forever war” and a chokehold on global oil supply in the Straits of Hormuz. The subsequent rise in global crude oil prices renewed inflation worries and led markets to expect the Fed to delay rate cuts. If today's February US monthly jobs report delivers an upside surprise, the Fed will likely pivot its dual mandate back toward inflation control. The USD becomes a better relative bet because America appears more insulated compared to its energy-dependent counterparts across Europe and Asia. As the conflict threatens global trade routes, renewed worries about supply chain fragility, and higher energy input costs, it disrupts the very growth dynamics that fuelled a rotation into Asian tech stocks as a hedge against overvalued US AI equities.

Conversely, the USD corrects lower when relief rallies take hold, fuelled by hopes for diplomatic de-escalation or a regionally contained conflict. A corresponding retreat in global crude oil prices would likely dampen inflation expectations, allowing markets to pivot back to a narrative of Fed cuts under President Trump’s nominee, Kevin Warsh. Fed Governor Stephen Miran said that the Iran conflict and higher oil prices are unlikely to push up inflation and keep the Fed on track for 100-bps of interest rate cuts this year.

However, breaking the deadlock over the USD’s direction remains difficult in the short term, as the 'endgame' is stalled by conflicting definitions of victory among primary players in the Iran conflict. Israel seeks nothing less than the total collapse of the Iranian regime to eliminate an existential threat. President Trump’s goals are likely to be more transactional and time-bound, inferring his comment that the “new Iranian leadership wants to talk.” However, Iran’s power is currently split among a temporary council comprising Ayatollah Alireza Arafi, President Masoud Pezeshkian, and Judiciary Chief Gholam-Hossein Mohseni-Ejei. Political analysts note that this council is ideologically fragmented, making a consensus on a "peace deal" nearly impossible in the short term. The above deadlocks are further complicated by the Middle Eastern nations, who outwardly condemn Israel's military scale while harbouring intense anger toward Iran for its unprecedented strikes against all six Gulf Cooperation Council (GCC) members. Saudi Arabia has officially warned that any further "concerted attack" on its oil infrastructure will trigger direct military retaliation against Iranian oil facilities. Saudi Arabia and the other five GCC nations have issued a joint statement that aligns with Trump’s stance on the “right to self-defence.”

President Trump is still acutely focused on the upcoming November midterms. Kristi Noem became the first cabinet member to be replaced as Secretary of Homeland Security in Trump 2.0, following the confrontational congressional hearings and scrutiny over the enforcement of immigration policies. Trump is likely to care about voter backlash for a war in Iran that the Americans do not want, his campaign pledge to avoid "forever wars," and the prospect of higher oil prices adding to business costs and consumers’ cost-of-living. The fiscal cost of Operation Epic Fury, coupled with the Senate's failure to check executive war powers, has driven US Treasury yields higher and posed a challenge to Trump’s goal for lower interest rates. Following the Supreme Court’s ruling against Trump’s IEEPA tariffs, the US Court of International Trade (ICT) judge has started ordering the government to refund paid tariffs, directly challenging the Justice Department’s attempts to slow-walk the process. More importantly, the ICT’s judge ruling contradicts President Trump’s longstanding claim that foreign nations, not Americans, pay for his tariffs.

Although Iran is dominating the headlines today, it may become less so as the midterms draw nearer. The experience of the Russia-Ukraine war suggests that financial markets tend to develop fatigue toward geopolitical shocks over time, shifting their attention back to broader macroeconomic concerns such as economic growth, inflation, and job security. That outlook hinges on oil staying under USD100/barrel. If prices surge past that mark, Trump might have no choice but to pivot and authorize a release from the strategic reserves. While we remain vigilant about more upside for the USD in the short-term, it is premature that it would not end the year lower.

Quote of the Day
“War does not determine who is right - only who is left.”
     Bertrand Russell

March 6 in history
Dmitri Mendeleev presented the first periodic table of the elements to the Russian Chemical Society in 1869.