Could a repeat of the 2022 slump below par be coming? The Iran conflict exposes Europe's "energy weak spot" again, putting pressure on the euro exchange rate.

The surge in oil and natural gas prices highlights Europe's vulnerability: when energy prices rise, the region's trade balance worsens, and the currency often reflects this pain - the Euro weakens. This week, due to the Middle East war causing oil prices to rise by over 15%, and natural gas prices doubling at one point, the currency fell by about 2% against the US dollar. Europe's dependence on imported energy means that compared to the United States, the world's largest oil producer, commodity price increases have a more direct impact on Europe's economic purchasing power. It is this dynamic factor that caused the Euro to fall below parity during the 2022 energy crisis. Chris Turner, head of foreign exchange strategy at ING Bank, said that the duration of the energy shock is "far more important for the Euro than the widespread demand for safe havens," which will determine whether the Euro falls to around 1.10-1.12 US dollars, or finds support near 1.15 US dollars. Themistoklis Fiotakis and his team of strategists at Barclays Bank pointed out that the market reaction to the outbreak of the Russia-Ukraine war in 2022 highlights the Euro's sensitivity to energy shocks. Based on past experience, for every 10% increase in oil prices, the US dollar typically appreciates by 0.5% to 1%; while for similar fluctuations in natural gas prices, the Euro depreciates by about 0.25%. They added that this week's movements fall completely within this range, so buying the Euro at this time "requires a high level of confidence in de-escalation of the situation, therefore may not provide good risk-return". The direction of the currency market will likely depend on the development of the conflict. For analysts at Goldman Sachs, a key question is whether investors will stop hedging extreme outcomes even though higher energy prices will harm the economy by pushing up inflation and reducing growth. Strategists including Stuart Jenkins wrote: "any clear signs distinguishing risk shocks from energy shocks in the market will be key differentiating factors in relative currency performance." Due to the reliance of Asian economies on fuel transportation through the Strait of Hormuz, which is currently blocked due to the war, Asian currencies are facing additional vulnerabilities. The US dollar index rose by 1.4% this week, potentially marking the largest single-week gain since November 2024. Meanwhile, a similar index measuring Asian currencies declined by 0.9%. Another factor affecting exchange rate movements is the change in market expectations for interest rates due to rising energy prices. Goldman Sachs pointed out that the countries with the largest exchange rate fluctuations are those whose central banks are preparing to cut interest rates this year - especially the Bank of England, which helps explain the rise in the pound against the Euro this week. In contrast, central banks in Japan, Australia, and New Zealand, which were previously expected to raise interest rates, saw more moderate fluctuations in short-term bond yields. This imbalance of effects is forming a clear strategy. Steven Barrow of Standard Bank suggests shorting the Euro against the US dollar and the Australian dollar, as he believes energy prices will not fall in the short term. Fiotakis of Barclays Bank also reached the same conclusion: currencies benefiting will be those with stable trade conditions such as the Australian dollar, as well as safe-haven currencies like the Swiss franc, while European currencies will continue to be under pressure.