USD: Dollar surges as containment fears mount
The sudden shift from hopes of significant progress in negotiations to a full-scale, unprecedented leadership campaign against Iran has caught global markets completely off guard. Unlike the narrow raids of the recent past, the current focus on neutralizing core political targets, compounded by the ambiguous endgame objectives of the US and Israel, is inherently harder for the market to price. This is no longer just another page from the standard geopolitical playbook but a fundamental move that puts every previous assumption of containment at risk, skewing the global outlook toward a fatter-tailed distribution of risks.
This escalation places the energy market at the absolute center of the macro conversation, moving well beyond just the Strait of Hormuz. While the threat to the 20 million barrels of daily oil moving through the Strait is severe, physical disruptions are already hitting natural gas. Israel has temporarily shut down its Karish and Leviathan gas fields as a precautionary measure. More drastically, Qatar was forced to shut down liquefied natural gas (LNG) production at the world’s largest export facility following an Iranian drone attack, sending European gas prices surging by more than 50%. A shared Qatari assessment warns that if shipping lanes remain severely disrupted by mid-week, the market reaction for natural gas could become even more significant than Monday’s sharp spike. What was once considered a remote tail risk has moved uncomfortably close to a base case.
Behind the scenes, a frantic diplomatic effort is underway to prevent the conflict from spiraling into a wider regional war. The United Arab Emirates and Qatar are privately lobbying allies to help persuade President Donald Trump to find an off-ramp that would keep US military operations against Iran short. Their push for a swift, diplomatic resolution aims to preempt a prolonged energy price shock and broader regional contagion. However, reflecting the high stakes and fear of proxy retaliation, both Gulf nations are simultaneously rushing to upgrade their air defense capabilities, with the UAE requesting medium-range systems and Qatar seeking urgent help to counter further drone attacks.
In this environment, standard economic data reports this week, such as the NFP payrolls, will likely be ignored in favor of regional conflict headlines. We expect a direct correlation where the US dollar typically benefits, fueled by both higher costs and a rush for safety. While energy-sensitive currencies like the Yen may weaken enough to bring the currency closer to intervention territory, the dominant force remains the global scramble for liquidity. Ultimately, the length and breadth of the hostilities will dictate how long these premiums last, but for now, the flight to quality is the trade that matters.
What’s the FX outlook as these Middle East tensions escalate? The US Dollar gained 1% yesterday, its highest gain since July 2025. The Euro, traded ~1% down yesterday, should stay offered as the region suffers directly from the Qatari LNG supply shock and its broader reliance on energy imports. The Japanese Yen is following a similar path, losing ~0.8% yesterday as a major oil importer. The Swiss Franc, which was expected to gain on safe-haven flows, surprisingly lost around ~1% to start the week after the Swiss National Bank indicated it was prepared to intervene in FX markets. Among commodity currencies, the Canadian Dollar is outperforming the Aussie and Kiwi due to its energy ties, but remains weaker against the US dollar.
This currency divergence is structurally supported by a fundamental shift in the US dollar’s relationship with energy markets. Historically, the USD exhibited a negative beta to oil, but this correlation has inverted entirely, with the USD beta to oil recently spiking to statistically significant positive highs. This means the dollar now strengthens simultaneously with rising oil prices, acting as a compounding economic shock for import-reliant nations. Assessing net oil imports as a percentage of GDP highlights exactly who carries this burden: major Asian economies like South Korea (approaching 4%) and India (over 3%) are highly exposed to an oil spike. Similarly, EU nations like Spain, Italy, and Germany carry notable positive net import balances. Conversely, the US sits near zero, demonstrating significant insulation from the physical oil shock, which ultimately reinforces the dollar’s safe-haven dominance in this specific macroeconomic environment.
CAD: Outperforming G-10 since last Friday
Within the G10 and commodity space, the Canadian Dollar is outperforming the Aussie and Kiwi but remains softer against the USD. The recent spike in oil prices, paired with equity market volatility, has bolstered the US Dollar. Expect the USD to remain well-supported until there is more clarity regarding the current conflict.
Although the macro has taken a backseat, is key to remind that after the recent release of Q4 GDP, the CAD has remained remarkably stable against the USD.
The Canadian economy navigated a delicate transition in 2025, posting a 1.7% increase in real GDP, its slowest annual growth rate since the pandemic. This cooling trend culminated in a 0.2% contraction during Q4, primarily driven by a significant inventory hangover as businesses pulled back on stock levels. However, the year ended on a more hopeful note as December saw a monthly rebound fueled by manufacturing and wholesale trade. While the average growth rate of 1.9% over the last three years isn’t technically recessionary, it remains historically sluggish, reflecting an economy struggling to maintain momentum amidst shifting global demand and lower exports to the United States.
Within this slow-growth environment, total investment rose by 1.4% in real terms, marking its strongest performance since 2021. Yet, a closer look reveals that this progress is largely cosmetic, as investment continues to shrink as a share of the total economy. Much of the recent surge was actually fueled by a spike in government defense spending, which jumped to $29 billion last year, rather than sustainable private sector activity. When removing these imported weapon systems, business investment remained essentially flat, continuing a worrying trend where capital expenditure has declined in 12 of the last 15 quarters. This lack of momentum leaves the nation at just 3% of the ambitious $1 trillion five-year investment target recently proposed by Mark Carney.
The structural health of the economy is further challenged by a shrinking goods trade sector, with two-way merchandise trade falling below 50% of GDP for the first time outside a recession since the early 2000s. Although the total value of trade saw a nominal increase to $1.58 trillion, this was merely a reflection of higher prices; actual trade volumes contracted as exports faltered. This retreat in trade prominence highlights a shifting economic landscape where traditional engines of growth are sputtering. Despite these manufacturing hurdles, the economy has found support from steady government spending and an unexpected degree of underlying resilience in household activity, preventing a deeper recessionary spiral.
LatAm FX: Hurt by fly-to-quality
Emerging market currencies have kicked off the year with significant strength, fueled by investors diversifying their portfolios and improved terms of trade for commodity exporters. Latin America, in particular, saw a massive surge of inflows in January, sparking outsized moves in the Brazilian and Mexican equity markets. While short-term fluctuations in risk sentiment have put a cap on further advancement, the expectation is that these high-yield markets are well-positioned to continue their upward trend once risk-on returns. Between their commodity exposure and proximity to the U.S. market, the region has solidified its status as a compelling destination for global capital.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: March 2 – 6
All times are in EST
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
