Iran War Splits Markets: Oil Winners vs Currency Losers

The Iran war has entered its third month, and the market landscape is no longer a uniform risk-off trade. The conflict has bifurcated asset classes into clear groups: those that benefit from higher oil prices and those that suffer from the resulting inflation and currency stress.

Oil has climbed persistently since the outbreak, holding above levels that force central banks in oil-importing economies to recalibrate policy. For forex markets, the transmission is direct. Higher energy costs feed into headline inflation, which in turn delays or reverses rate-cutting cycles in countries that cannot absorb the price shock. The dollar has drawn bids not because of US exceptionalism but because the Federal Reserve faces the same inflation read and is unlikely to ease soon. The result is a stronger dollar that compounds pressure on already-vulnerable currencies.

Oil to Inflation: The Direct Line

The simple read is that war drives oil higher and everything else lower. The better market read separates the mechanism. Oil prices raise production costs across manufacturing and transport, lifting core goods inflation. Policymakers in Asian economies that rely on energy imports now face a dilemma: hold rates steady and watch import-driven inflation erode purchasing power, or hike and choke domestic demand. The first option risks capital flight; the second risks a growth slowdown.

This feedback loop is most visible in the currency market. The dollar has strengthened against a basket of emerging Asian currencies, with the yen and won among the most sensitive given their dependence on imported crude. The rupee has also slipped, though central bank intervention has limited the slide. What changes next depends on whether oil maintains its war premium or whether diplomatic progress allows supply routes to normalise.

Dollar Bids and Asian Currency Stress

For forex traders, the Iran war has turned carry trades into dangerous propositions. High-yielding Asian currencies like the Indian rupee and the Indonesian rupiah had attracted inflows earlier this year on expectations of stable funding costs. Those inflows are reversing as oil bills rise and current account deficits widen. The USD/JPY pair has shifted from a yield-driven trade to a risk-and-oil proxy. A sustained break above recent resistance would signal that dollar strength is not just a war repricing but a structural shift driven by inflation stickiness.

The EUR/USD has been less affected directly, yet the euro’s vulnerability to energy prices – given Europe’s own import reliance – means any further oil rally could push the pair below 1.06. The pound faces similar headwinds, though the Bank of England’s tighter stance has provided some cushion. Markets are now watching the next round of US-Iran talks for any sign of de-escalation. Failure to make progress will keep the current winner-loser split intact.

What Confirms or Weakens the Setup

A continued oil rally would confirm the pattern: dollar bullish, Asian currencies bearish. A surprise diplomatic breakthrough or coordinated OPEC supply increase would weaken the setup, allowing currencies to recover lost ground. The next scheduled data point to watch is the weekly US crude inventory report and any official statement from Iran or the US about negotiation timelines. Until then, the market is pricing a persistent regime of higher energy costs and selective currency depreciation.

Use our forex market analysis and currency strength meter to track the real-time shift. For trade sizing, the position size calculator helps manage risk when volatility is elevated.