March brought another reminder that currency markets can reprice quickly when geopolitics begins to affect real-world supply chains. The dominant theme was the escalation of conflict involving Iran, the United States and Israel, which pushed the Persian Gulf into open confrontation and disrupted the flow of oil and gas through the Strait of Hormuz.
With energy transfers from Gulf producers effectively halted, the rise in global energy prices became the central transmission channel into foreign exchange markets. The US dollar benefited both from its traditional safe-haven role and from the relative support offered by shifting terms of trade. Higher energy prices and heightened uncertainty left higher-risk currencies under broad pressure, while markets reacted sharply to even limited signs of possible de-escalation. That produced large intraday swings and reinforced the sense that valuations were being driven as much by political headlines as by conventional macro data.
As the month progressed, it became clearer that the disruption was not being treated as a short-lived event. The continued impasse over the Strait of Hormuz raised the prospect of a more durable energy shock, and that mattered because investors began to reassess which economies were most exposed to imported inflation and potential supply shortages. Asia stood out as particularly vulnerable. Economies with thinner energy buffers, including Thailand, Vietnam and the Philippines, were forced into measures aimed at preserving fuel supply, while larger North Asian economies such as Japan, Korea and Taiwan appeared better stocked but still exposed to inflation pressure over time.
The contrast with some commodity exporters was notable. Countries such as Norway and Canada were better insulated because domestic energy production offered a partial cushion against the shock. The UK was presented as relatively protected as well, owing to lower direct reliance on Middle Eastern crude imports and greater linkage to supply from the United States and Norway. That relative insulation helped sterling remain firmer than might otherwise have been expected against a strong dollar.
The Australian and New Zealand dollars were weaker examples of the opposite dynamic. Their reliance on imported crude and relatively limited oil reserves left them more exposed to the effects of higher energy prices. This placed added pressure on currencies that are often sensitive to global risk appetite even in more stable conditions. When those cyclical characteristics combine with direct energy vulnerability, positioning can become more challenging.
Central banks then became the second major driver of the month. Policymakers were forced to respond to the inflationary implications of higher energy costs, and markets moved rapidly to reflect that. The Reserve Bank of Australia raised rates, though the narrowness of the vote moderated the currency response. The Bank of England kept policy unchanged, but communication shifted in a more hawkish direction and market pricing moved dramatically from expecting cuts to expecting hikes by year end. That repricing provided support for sterling, while also showing how quickly policy expectations can change when an external inflation shock takes hold.
Elsewhere, the European Central Bank held rates steady but saw expectations build for tighter policy, while the Swiss National Bank remained alert to franc strength and the risk of intervention. In Japan, policymakers acknowledged inflation risks linked to energy but stayed patient, leaving the yen weaker against the dollar and closer to levels that prompted concern about possible intervention. The Federal Reserve also held steady, but its updated guidance suggested a more cautious path for easing, with officials signalling that the war had made the inflation outlook less certain.
Record plc (LON:REC) develops bespoke, high-quality, sophisticated solutions for institutional investors, a unique offering stemming from Record’s knowledge and expertise gained from its core currency hedging markets.
