The dollar has regained the upper hand

• Following Trump’s speech, markets are bracing for an escalation over Iran.
• Japan’s failure with currency interventions could push USDJPY to 175.

The US dollar quickly recouped its losses thanks to Donald Trump’s comments. He threatened Iran with air strikes on its energy infrastructure if the Strait of Hormuz is not opened. The promise to send Iran back to the Stone Age contrasted with his previous statement about ending the conflict within 2–3 weeks amid successful negotiations. This caused EURUSD to plummet after the rally of the previous two days.

Polymarket participants estimate the chances of the war between the US and Iran ending by the end of June at 65%. A closure of the Strait of Hormuz before then would be a real disaster for the global economy. The IEA warns that the oil market deficit will continue to widen. In March, the market remained stable due to the supply from February. However, in April, conditions risk deteriorating rapidly, suggesting that additional releases from strategic reserves may be required.

The euro is gradually losing its key support from expectations of aggressive monetary tightening. Investors are beginning to question the ECB’s past decisions. Was the biggest mistake in 2022, when it underestimated the inflationary impact of the energy crisis, or in 2011, when it raised rates in response to rising prices? That earlier tightening weakened the eurozone economy and ultimately forced the ECB to cut rates more aggressively than before.

Growing risks of a conflict escalation in the Middle East have halted the USDJPY correction and handed the initiative to the bulls. UBS forecasts that the US dollar will rise to ¥175 by the end of the year. A surge in Brent to $150 per barrel will render Japan’s currency interventions ineffective. The Ministry of Finance’s spending will merely create more favourable entry points for speculators to sell the yen. As a result, Sanae Takaichi will begin to curb inflation through fiscal measures. This will signal to hedge funds that the government is no longer concerned about USDJPY. They will step up their purchases of the pair.

Gold took a hit following disappointment with Donald Trump’s rhetoric. The precious metal failed to hold $4,800 and is set to return to March lows amid central banks, led by the Fed, keeping interest rates at high levels for an extended period. India has begun to defend its currency against depreciation by selling US Treasury bonds and continuing to accumulate gold. At the very least, this provides some support for gold. However, India may very soon follow Turkey’s lead by selling off its metal reserves.

The FxPro Analyst Team