Monthly Foreign Exchange Review

The military action in Iran has changed the outlook for currencies including the USD. The USD is the world’s safe-haven currency, and war is a legitimate reason to flee some of the most risky-assets around the world. The factors pushing the USD weaker in January and February have been swamped by the “risk-off” trade.

Bonds and rates have not had unusually large moves. Markets have had a subdued response.

Oil prices might be a wild card on economic impact—oil prices are $15/barrel higher than in November and December 2025. If oil prices quickly fall back to the mid-60s, expect a “status-quo” response to this military action. If oil prices remain elevated for months, this will change the inflation outlook.  

The USD showed some minor strength, recovering slightly in February after the late January sell off. The Supreme Court ruling striking down tariffs on February 20 had little impact on the USD. USD is showing some weakness across most major currencies but in particular against the Mexican Peso and Chinese Yuan.

Inflation crept back up to 3%, and inflation is higher today than it was in May of 2024! My view is that we will see an “unofficial” higher inflation target from new fed chair, Kevin Warsh, who starts his role in May.

The revision for jobs created in 2025 was extremely negative. The U.S. economy only created 181,000 jobs in 2025. The only worse revisions were during the GFC and COVID-19. These are recession levels of job creation. Consumer sentiment has been low, and it remained low in February. The large negative revision to jobs created in 2025 helps us to understand why consumer sentiment is weak—the jobs market has not been strong.

Expectations for rate cuts over the next 12 months increased from 1–2 cuts to 2–3 cuts. The weak jobs numbers combined with “not bad” inflation numbers are raising expectations for more cuts. There is some good news: Mortgage rates are ticking down. Thirty-year rates fell to their lowest level since 2022, to 6.11%.

Summed up, this news calls for more rate cuts and possibly more than markets expect today. The risk is that we do move from 2–3 cuts to a 4–5–6 rate cut expectations which would push the USD much weaker.

To recap—expect this war to reset the currency levels on a one-off basis with a stronger USD, but most of the prior economic fundamentals remain in place. If oil prices remain elevated, the inflation outlook will change.

EURUSD spent most of February above the old 1.18 highs after pushing above 1.20 in late January. Overturning tariffs had little impact, and EUR strength remains intact due to low 1.7% inflation and EU Central bank holding rates steady. Historically, low unemployment across the EUR further supporting the EUR. EU trade surplus with the USA fell to lowest levels in the last decade, putting pressure on the German/EU export machine. Possible outcome: Germany runs higher deficits to rearm itself, helping to keep lid on EUR strength. Bloomberg analysts predict a median of 1.16 for the EURUSD rate in Q2 2026.

The British struggled to hold its gains against USD in February; on more news the UK economy is struggling. BoE held rates at 3.75%, but this was a close 5–4 decision—expect a rate cut in March. UK inflation fell to 3%, and with unemployment high, GBP cannot find footing. GBP likely to underperform in 2026. Analysts polled by Bloomberg predict a median of 1.3300 for the GBPUSD rate in Q2 2026.

CAD strength overwhelmed the negative reaction to PM Carneys speech about the new global structure, pushing to a low of 1.3482. Canadas GDP contracted 0.6% last year, so tariffs are certainly having an impact. Next rate announcement is 3/18, and no cut is expected from 2.25%. The new tariff regime is causing Canada to try and shift away from US imports, but proximity makes this difficult. Analysts polled by Bloomberg predict a median of 1.3600 for the USDCAD rate in Q2 2026.

USDJPY was very volatile in February, with nearly 10 points of movement from the end of January. USDJPY fell from 157 to 152 after the elections, then reversed to 157 again! Landslide victory for the LDP in Japan likely to boost investment in technology and defense spending. March outlook: Possible test the old highs of 159, because government spending likely to be unleashed due to a full supermajority by the LDP – and government moving fast. Analysts polled by Bloomberg predict a median of 152 for the USDJPY rate in Q2 2026.

USDMXN paused in February after two months where it gained 6% against the USD. USDMXN is up nearly 17% in the last 12 months. Remarkably, Mexico posted its largest month of exports to the US in history; this is after tariffs in place. Look for a small bounce in March to test the 17.5000 level, but all the pieces remain in place for the MXN to resume its trend stronger. Analysts polled by Bloomberg predict a median of 17.90 for the USDMXN rate in Q2 2026.

The CNY strengthened more than 3.7% in just 3 months vs. the USD, yet trade with China is larger than ever. Why? Our supply chains cannot easily switch back to US production. The US tariffs on China are large enough to cause many companies to want to change suppliers, but it turns out for many of the lower quality goods China imports, there is not much domestic supply. Charges are passed to consumers via price increases and surcharges. Expect the post-war yuan to continue to march stronger vs. the USD in Q2 2026. Analysts polled by Bloomberg predict a median of 6.86 USDCNY for Q2 2026.

Associated Bank can transact foreign exchanges in more than 100 currencies. Companies interested in learning more about making payments in foreign currencies or in hedging currency exposures should contact their Associated Bank Relationship Banker or the bank’s Corporate Foreign Exchange Department at 866-524-8836 or email fxcapmarkets@associatedbank.com.