To The Moon

A team of foreign exchange strategists at JPMorgan Chase indicates that escalating military conflict between the U.S.-Israel alliance and Iran, which has caused widespread disruptions to crude oil and LNG transportation across the Middle East, poses the most significant threat to the bank's forecast of a substantial U.S. dollar depreciation this year if oil-driven shocks persist. For JPMorgan and other Wall Street institutions holding a bearish view on the dollar, their trading rationale faces a major test from rising oil prices—should oil sustain gains and breach $100 per barrel, the logic underpinning dollar shorts could completely collapse. For months, JPMorgan has maintained a short position on the U.S. dollar while favoring high-beta currencies such as the Australian dollar and the Mexican peso, which are particularly sensitive to global risk sentiment. Strategists Meera Chandan, Octavia Popescu, and Patrick Locke noted on Monday that this stance was originally based on the assumption that unprecedented disruptions in commodity markets were unlikely, but they now observe this view is gradually losing validity. Following airstrikes by the U.S. and Israel against Iran over the weekend, international oil benchmarks Brent crude and WTI crude recorded their largest single-day gains in four years. As Iran retaliated, the conflict triggered significant ripple effects across the Middle East and Gulf nations. U.S. President Donald Trump stated that bombing operations against Iran could continue for weeks. The JPMorgan strategists wrote, "The escalation of military conflict between the U.S./Israel and Iran marks a major risk to regional stability, with foreign exchange market pricing and reactions primarily channeled through energy prices." They anticipate that higher energy prices will drive a significant rise in inflation, thereby boosting the U.S. dollar while pressuring other sovereign currencies including the euro and the Japanese yen. If risks around the Strait of Hormuz push oil into triple-digit territory, the triple pressures of inflation, interest rates, and consumption would not only invalidate the old playbook of buying the dip in U.S. stocks but also expose highly leveraged short-dollar bets to substantial losses. Although oil prices reaching $100 is not yet the consensus among petroleum analysts, it has emerged as a major potential risk considered by equity bulls. Sustained surges in energy costs could not only threaten consumer spending growth but also rekindle inflation, prompting renewed interest rate increases—a scenario that played out in real-time during Monday's trading: U.S. Treasuries, long regarded as classic safe-haven assets, failed to serve their traditional role amid heightened geopolitical tensions, with yields rising sharply due to resurgent inflation fears and concerns that the Federal Reserve might pivot toward rate hikes in response to high prices. West Texas Intermediate crude surged as much as 12% to $75.33 per barrel before paring half its gains to trade near $71. Brent crude rose 7.4% on Monday to $77.85 per barrel. The Bloomberg Dollar Spot Index climbed 0.8% during Monday's session to a five-week high, moving in tandem with U.S. Treasury yields. The euro fell nearly 1% against the dollar to $1.1695, while the yen declined over 1% to 157.71 per dollar, its weakest level in three weeks. With President Trump announcing that military action against Iran will continue "until objectives are met," potentially lasting for weeks, and hostilities spreading beyond Iran and Israel to other Middle Eastern economies—such as Iranian drone and missile attacks on key U.S. infrastructure in Dubai, Abu Dhabi, Bahrain, and Kuwait, and Lebanon launching a new round of rocket strikes against Israel—the prospect of prolonged, unpredictable geopolitical turmoil in the region and potential ripple effects from rising oil prices are giving fund managers new reasons to sell risk assets like equities en masse and seek refuge in traditional safe havens such as gold and the U.S. dollar, as well as crude oil, which stands to benefit significantly from Middle Eastern tensions in the short term. JPMorgan notes that in currency markets, four distinct trends related to the divergence between energy importers and exporters include: the U.S. dollar benefiting against all currencies as the U.S. has become a net oil exporter, with the bank emphasizing that "any further momentum to unwind dollar short positions could provide additional tactical support for the dollar"; currencies of other oil exporters, such as the Norwegian krone, and commodity currencies more broadly, also receiving support; currencies of oil-importing nations, such as the euro, Polish zloty, Czech koruna, and Hungarian forint, likely to decline the most, followed by core Asian sovereign currencies; and safe-haven currencies diverging, with the yen under pressure, the Swiss franc potentially performing relatively well, and gold emerging as a clear net beneficiary. The market currently faces the question: Is this a prolonged regime-change operation resembling the political struggles that followed the 2003 U.S. invasion of Iraq, or a short-term geopolitical shock aimed at forcing Iran's remaining leadership to negotiate, similar to the Venezuela model? If diplomacy resumes quickly and Iran avoids targeting core energy infrastructure and shipping in the Middle East, the initial risk-off sentiment will likely fade. If the conflict persists and draws in energy production and export infrastructure, markets will have to reprice for an environment of higher oil prices, interest rates, and foreign exchange volatility, with equity markets likely paying a heavy price for stagflation trends, according to macro strategist Michael Ball of Bloomberg Strategists. With crude oil and LNG shipping through the Strait of Hormuz nearly stalled and a major refinery in Saudi Arabia experiencing production disruptions, energy markets are facing severe supply-side shocks, driving oil prices sharply higher. If the Strait of Hormuz remains closed to oil and gas transport for an extended period, some Wall Street analysts have incorporated a $100 oil price into their financial market models. JPMorgan's FX strategists advise traders to close out or reduce long positions in the euro. They suggest that if energy prices continue rising, the euro could fall to the $1.10–$1.13 range, nearing levels seen a year ago, though this is not their base case. The strategists wrote that once the outlook for oil markets becomes clearer, they will look for opportunities to reestablish long euro positions. Nevertheless, JPMorgan's FX strategists maintain short positions on the U.S. dollar against currencies such as the Australian dollar and Norwegian krone, as these currencies "are well-positioned to benefit from relative terms of trade and potential growth trends under a scenario of structurally higher energy prices"; however, they have tightened stop-loss levels on these positions to protect existing gains.