How the dramatic changes in the situation in Iran affect the foreign exchange market

# Morning FX Brief

The hardest-hit currencies are those of energy importers such as the Japanese yen and the euro. The euro has fallen to the key psychological level of **1.17**, while **USD/JPY** has returned to the **158** intervention zone. The U.S. dollar index has further upside momentum in the short term, with risk aversion continuing to dominate markets. The Chinese yuan has been caught in the crossfire, with its appreciation trend stalled—but this has instead created a window for **settlement above 6.90**.

On the final weekend of February, following the collapse of Iran nuclear talks (a cover for the attack), the U.S. and Israel launched the joint operation **“Epic Wrath”**, eliminating Iran’s top leadership including Supreme Leader Ayatollah Khamenei in a single strike.

This represents the **“harshest punishment”** the U.S. has inflicted on Iran since its bloody crackdown on mass domestic protests, with the explicit aim of toppling the Islamic regime that has ruled for 47 years.

Global risk aversion has surged dramatically, as markets reassess where U.S. hegemony may lead the world. Unlike the swift capture of Venezuelan President Maduro, Iran—with the strongest military in the Middle East—has seen the IRGC’s retaliation evolve into a **protracted conflict**.

## I. How Markets Have Reacted

Previously, whether it was Trump’s threats to seize Greenland or the lightning capture of Venezuela’s president, episodes of military conflict typically played out as **“brief risk aversion + de-dollarization momentum”**. In markets, the dollar index would rebound for half a day before resuming its downtrend.

**Chart: Oil’s Year-Long Surge**

This time, however, the market reaction has been far more intense. Crude prices have skyrocketed: **Brent crude futures** jumped **15% in three days**, approaching five-year highs. Iran’s closure of the **Strait of Hormuz**—through which **one-fifth of global seaborne oil** passes—ignited panic over supply. Several defiant oil tankers attempting to transit the strait have been sunk. Inflation expectations have reignited: the **1-year SOFR swap rate** rose **5bp in a single day**, while longer-dated yields fell on safe-haven flows, flattening the curve sharply.

The **DXY** erased all February losses in one move, halting the yuan’s rapid appreciation. The hardest-hit currencies are those of energy importers such as the Japanese yen and the euro. The euro fell to the key **1.17** level, and **USD/JPY** returned to the **158** intervention zone.

**Chart: Sharp Rebound in the U.S. Dollar Index**

## II. Outlook for Subsequent Trends

The decisiveness of the U.S. operation exceeded global expectations. Launching a decapitation strike in broad daylight while nuclear talks were ongoing—deploying elite forces—clearly reveals a **long-planned operation**.

Iran’s subsequent trajectory remains highly uncertain. Since the 1979 Islamic Revolution, the country has been under theocratic rule, with deeply entrenched religious and democratic forces in a delicate balance. The IRGC-led monopoly interest groups, though outmatched by the U.S., still retain military control domestically.

Trump has called for pro-U.S. forces to take power, but this process is likely fraught with power struggles. Therefore, the **DXY retains further upside momentum in the short term**, with risk aversion remaining the dominant market driver. The yuan has been affected, with its appreciation trend blocked—but this has created a window for **settlement above 6.90**.

**Chart: Volatility Spikes Sharply**

## III. Summary

1. The joint U.S.-Israel strike on Iran is the **most consequential political event of 2026**, reshaping the global geopolitical landscape. International risk aversion has risen sharply, fueling an oil price surge.

2. The conflict is unlikely to end soon. The **DXY has upside momentum**, interrupting the yuan’s appreciation. Even firms that missed the earlier move and wish to wait can now **sell USD/CNY call options amid rising volatility** to lock in settlement costs.

Source: Morning FX Brief

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