Monthly Foreign Exchange Review
Geopolitical tension centered on Iran is reshaping markets—boosting the USD, lifting energy prices, and complicating the inflation outlook. At the same time, soft economic data signals growing pressure on global growth.
Iran news continues to dominate markets around the world, with Iran announcements and events causing significant movements in currencies, energies and stocks. The economy more generally faced a series of moderately negative numbers showing low growth, weak employment and higher-than-expected inflation numbers.
The USD strengthened in March, shrugging off the economic weakness. The USD remains the world’s safe-haven currency, and most currencies lost ground vs. the USD in March in a moderate flight to quality. The USD index gained 2.5% since the last trading day in February, one day before the Iran conflict began. All the USA’s major trading partners lost ground vs. the USD.
Rates are likely to remain where they are through the end of the year, well after the new Fed Chair Kevin Warsh takes over in May. Interest rate expectations changed dramatically over March, and rates are now expected to remain at 3.5% for the next 12 months, vs. expectations of 2–3 rate cuts at the end of February. This is entirely due to hot inflation numbers and the military action in Iran.
Economic data came in weak and inflationary in March. For inflation, core PCE came in at 3.1%, GDP price index at 3.8%, while PPI showed a shocking 0.7% month over month gain. These numbers disrupted the mainstream view that inflation was contained and falling. Note: these inflation numbers are for a period before any war related energy price increases. Q4 GDP was revised downward to 0.7%
Labor market showing continued weakness: Unemployment numbers for later this week are expected at only 78k, after coming in after a loss of 92k on March 6. JOLTS hiring rate data of 3.1% means hiring is at the same rate as the bottom of 2020 pandemic levels.
Energy prices are Iran-conflict driven and saw a ceiling of $100 for most of March, with some closes above $100 near the end of the month. Forward prices for oil remain much lower, with oil for delivery six months out trading only $78 a barrel. Crude gained 40% and gasoline 33% in March, so expect a large contribution from energy to the April inflation numbers. The question of why oil has not spiked as much as during other large supply disruptions remains open. The Strait of Hormuz has completely shut down oil passage from friendly countries as of March 31.
April Outlook: Currency markets entirely dependent on Iran news and implications. Iran conflict could end any day or extend for months. The Iran energy squeeze is coming when the U.S. is facing economic headwinds, and domestic energy production partly insulates the USA from some of the worst consequences. Tariffs still tend to push the USD stronger, while inflation is higher than expected, and growth is stalling.
Summary: Potential for higher than typical volatility in USD pricing vs. other currencies over April with both 1.15 and 1.20 in play vs. the EUR.
EURUSD
Source: Bloomberg Finance LP
EURUSD traded lower through March, reflecting USD strength but also European exposure to the disruption in Middle East energy. EURUSD lost 3.5% to trade near the lows of its multi-month price channel. Brent Crude oil traded at +$20 premium to USA crude for most of the month. Inflation jumped to 2.5% in a late month print, well above the 2.0% ECB target. ECB rate cuts are off the table for now.
USDCAD
Source: Bloomberg Finance LP
USDCAD sharply higher late in the month, as USD safe haven status plus tariffs reality started to bite. Note the expected impact of tariffs is to weaken the CAD, so this price action makes sense. Canadian economy holding up well through mid-March, with 0.1% monthly GDP grown vs. 0% expected. Tariffs levels might be too low to shift many jobs, but it will shift the USDCAD.
USDMXN
Source: Bloomberg Finance LP
USDMXN bounced 4.5% in March to erase all the gains from Jan.–Feb. of this year. An unexpected rate cut by the Bank of Mexico to 6.75% reduced appetite for the popular peso carry trade. Carry trade = borrow USD at 3.5%, buy MXN, receive 7% interest with exposure to Mexico economy and peso appreciation. USD safe haven status hit the peso as well—the Iran conflict is boosting the USD against all currencies.
USDCNY
Source: Bloomberg Finance LP
USDCNY closed March where it opened March, 6.8975, which points to China managing the currency in a time of crisis. U.S.-China trade has fallen to the lowest levels since 2009 due to tariffs, but China had moved factories to other countries. It is proving difficult to move supply chains away from China-owned enterprises. CNY had been gaining ground against USD; conflict halted the rally. Expect the USDCNY rate to remain stable if China (and its mineral supplier, Australia) can maintain energy out of the ME. If oil flows are disrupted or slow significantly, China will have massive issues.
GBPUSD
Source: Bloomberg Finance LP
GBPUSD held up in March, closing only 2% weaker vs. the USD, this was the best of all major trading partners except China. The economic news out of the UK remained lackluster, with GDP growth at 0.1% for Q4 25. Uk consumer confidence hit another all-time low just days ago, and the country is mired without a direction. Inflation worries were already present, and the Iran oil price spike is not helping. Still, the GBP remained unchanged vs. the USD since the conflict. Is all the negative news already priced into the GBP?
USDJPY
Source: Bloomberg Finance LP
USDJPY weakened against the USD, continuing to knock on 35 years weakness vs. the USD. The election made it clear Japan was going to focus on Japan, and focus on being a competitive supplier of goods to the world. This means a weaker currency, and so higher inflation while keeping rates low is a great path to a weaker currency. The incredible 200%+ debt-to-GDP ratio actually helps here. Business confidence is high, consumer confidence is high, the economy is growing and inflation is high, but the BoJ isn’t flinching. Japan is getting what it wants: A weaker JPY.
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