The closure of the Strait of Hormuz has triggered a surge in oil prices, bringing the term &#34;stagflation&#34; back onto traders' screens, with bullish signals for the dollar lighting up. JP Morgan has completed two position jumps in less than three weeks: shifting from bearish to neutral on March 2, and now again turning tactically bullish, completely bidding farewell to a year-long bearish stance on the dollar.
According to the Wind Trading Desk, the core logic behind this shift is articulated quite straightforwardly by JP Morgan forex strategist Meera Chandan in the latest report: this is not based on a judgment of the trajectory of geopolitical conflicts, but rather a form of &#34;cautious insurance.&#34; Once energy shocks and stagflation pressures persist, and both stocks and bonds come under pressure, the dollar becomes the most effective combination hedging tool. Meanwhile, if market sentiment continues to deteriorate, the narrative of &#34;American exceptionalism&#34; may resurface, further supporting the dollar.
The transmission path of this energy shock presents a clear &#34;importing country/exporting country&#34; divide in exchange rates. Currencies of energy-exporting countries such as the dollar, Australian dollar, Canadian dollar, and Norwegian krone should benefit; the empirical shock to eurozone currencies is greater than that to Asia, but the absolute decline of the yen is usually the most pronounced. The trade conditions in the eurozone have collapsed, with natural gas inventories below the same period last year, and the fair value of EUR/USD has been depressed to 1.10-1.13, the lowest level since July 2025.
However, JP Morgan has also clearly delineated the boundaries of this shift: it is a tactical adjustment, not a permanent stance change. The medium-term forecasts for most currencies remain unchanged, with only the risk bias leaning more towards dollar appreciation. The newly opened macro portfolio trades involve buying an equally weighted basket of dollars against euros, Swedish kronor, pounds, and New Zealand dollars.
<h2>The logic behind the dollar turning bullish is defensive demand, with different trends under four scenarios</h2>
When the news of the closure of the Strait of Hormuz emerged on March 2, JP Morgan had already shifted from bearish to neutral. This further step is primarily based on: stagflation pressures causing both bonds and stocks to lose their hedging functions, with the dollar filling this gap.
Historical data supports this: periods when risk parity portfolios underperform highly correlate with a strengthening dollar. JP Morgan's quantitative model TEAM currently ranks the dollar as the highest-scoring currency—real yields, nominal yields, and relative stock momentum signals have all reversed, with only the valuation aspect being relatively weak. Additionally, the dollar's correlation currently remains at the 60 level, which is historically high, providing discount space for subsequent de-correlation trades.
JP Morgan has summarized four scenarios in the report:
<blockquote>
Scenario One: Extreme Escalation (Low Probability) The geopolitical situation deteriorates deeply, Azerbaijani gas supplies are disrupted, and market risk aversion fully erupts. The dollar strengthens significantly, with DXY rising 4.6% to 103.7, and the euro against the dollar falling to 1.10; currencies of energy-exporting countries (Canadian dollar, Norwegian krone) outperform, while currencies of high energy-dependent countries (Swedish krona, pound) come under significant pressure. Energy prices surge sharply, with TTF breaking 80 euros/MWh and Brent crude rising to 100–120+ dollars/barrel.
Scenario Two: Hormuz Disruption (Medium Probability) Shipping through the Strait of Hormuz is suspended until the end of summer, with market trends aligning with the extreme escalation scenario, but the impact is relatively contained
The US dollar strengthened, with the DXY rising 3.4% to 102.6, and the euro against the dollar maintaining a range of 1.10–1.13; TTF rose to €60–70 per megawatt-hour, and Brent crude oil climbed to $100–120 per barrel.
Scenario Three: Partial Normalization (High Probability) Shipping partially recovers within three weeks, with throughput rising to 70%, which is the current market benchmark expectation. The US dollar weakens, with the DXY falling 1.1% to 98.1, and the euro against the dollar rebounding to 1.17; currencies of energy-importing countries (GBP, EUR, JPY) strengthen, and the Canadian dollar returns to its financing currency attributes. TTF falls back to €40–45 per megawatt-hour, and Brent crude oil retreats to $70–80 per barrel.
Scenario Four: Complete Normalization (Medium Probability) Shipping fully recovers, sanctions on Iran are lifted, risk premiums completely dissipate, and the market trend aligns with partial normalization but with greater intensity. The US dollar significantly weakens, with the DXY plummeting 3.5% to 95.8, and the euro against the dollar rising to 1.20; TTF falls back to €30 per megawatt-hour, and Brent crude oil drops to just over $60 per barrel, returning to near recent lows.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/042b3017-8bea-486d-9de6-fc09e91da5e7.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/042b3017-8bea-486d-9de6-fc09e91da5e7.png"/>
</blockquote>
<h2>The euro and pound have two different ways of declining, while the intervention threshold for the yen has actually increased</h2>
Specifically, the euro faces quantitative pressure. The eurozone's terms of trade for goods have collapsed, natural gas inventories are below seasonal normal levels, and real interest rates have deteriorated significantly. These factors have pushed the fair value of EUR/USD down to the 1.10-1.13 range, the lowest since July 2025. Although nominal interest rates are tilted towards the euro, they cannot offset the deterioration of real interest rates. The second-quarter target has been lowered to 1.17, with the year-end target remaining at 1.20, but JPMorgan clearly states that this year-end target &#34;reflects a lack of visibility rather than confidence,&#34; with significant downside risks.
The pound's situation is more chaotic. JPMorgan has switched from a tactical bullish stance to bearish, with the GBP/USD target drastically lowered from 1.41 to 1.34. The reason is a double whammy: the UK has been hit harder than most G10 economies in the manufacturing PMI growth survey; at the same time, the stagflationary rise in UK government bond yields will not support the pound, as high rates in a stagflation environment scare away rather than attract capital. The local elections on May 7 (which may trigger a change within the ruling party) pose additional political tail risks, and the GBP is already significantly overvalued compared to its implied level based on energy dependence, leaving room for a correction.
The judgment on the yen is the most certain in the entire report—maintaining a bearish outlook, with USD/JPY at 158 in the second quarter and 164 by year-end. Rising energy prices directly worsen Japan's trade account, which is the main transmission channel. More subtly, since this round of USD/JPY increases is primarily driven by a broad strengthening of the dollar, the justification for intervention by the Japanese Ministry of Finance has diminished—intervening in a weakening yen makes sense, but intervening in a broadly appreciating dollar does not, thus the intervention threshold is actually higher than previously expected
<h2>Norwegian Krone and Australian Dollar Show Divergent Trends, Renminbi Remains Relatively Stable</h2>
The Norwegian krone is the currency that has benefited the most from the energy shock among the G10, with improved trade conditions, a hawkish stance from the Norwegian central bank, and EUR/NOK breaking through the lower bound of its multi-year range, which JP Morgan believes can be sustained. The FX purchases by the Norwegian central bank have turned negative this year (approaching NOK 80 billion daily), providing structural support. JP Morgan's quantitative model ranks the inflation momentum of NOK as the second strongest among the G10, directly driving the hawkish stance.
The logic behind the Australian dollar is more nuanced. The AUD/USD target for the second quarter remains unchanged at 0.73, primarily because the beta value of the Australian dollar to commodities has recovered over the past year, and the effect of commodity trade conditions has become &#34;effective&#34; again, which has not occurred during the mid-term from 2022 to 2025—during that period, the distortion of stock-bond correlation kept commodity-sensitive currencies under pressure. Domestic inflation in Australia remains above the RBA's target, with the market pricing in a 70% probability of an interest rate hike.
China is one of the major economies least affected by this round of global energy shocks. With a relatively low dependence on oil and gas imports, a diversified domestic power structure, and a light foreign capital holding ratio in Chinese assets, the Renminbi faces relatively low pressure from capital outflows. The USD/CNY target for the second quarter remains unchanged at 6.85. The relationship between past oil price hikes and the Renminbi's trade-weighted exchange rate also shows that the CNY often does not depreciate significantly with energy prices.

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The closure of the Strait of Hormuz triggers a stagflation alarm, with JP Morgan completing two position jumps in three weeks, completely bidding farewell to a year-long dollar short position and announcing a tactical bullish stance. The logic points directly to defensive demand—when both stocks and bonds are under pressure, the dollar becomes the only effective hedging tool. In four scenarios, the DXY fluctuates between 95.8 and 103.7, with the euro, pound, and yen each experiencing their own declines, while the Norwegian krone and Australian dollar reap the benefits of energy

- The closure of the Strait of Hormuz has caused oil prices to surge, prompting traders to reconsider the implications of "stagflation," leading to a shift in JPMorgan's stance from bearish to bullish on the dollar.  
- JPMorgan's core reasoning for this tactical shift is not based on geopolitical assessments, but rather as a "prudent hedge" against persistent energy shocks and stagflation pressures, which mean the dollar is most effective in this scenario.  
- The report outlines four potential scenarios for currency movements, projecting that the dollar will strengthen amidst energy price volatility, while the euro and pound face significant downward pressure due to worsening trade conditions and inflation concerns.

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After a year of being bearish, JPMorgan Chase announces: a tactical shift to bullish on the dollar!