Middle East conflict roils oil, dollar, and emerging FX

The deepening standoff between the US and Iran has transformed oil markets into a geopolitical flashpoint. President Trump's rejection of Iran's peace proposal on Monday triggered another leg up in crude, with Brent and WTI now commanding prices not seen since the conflict began, while global supply chains recalibrate around the prospect of a prolonged Strait of Hormuz closure. Aramco has warned of losing 100 million barrels per week as long as the strait remains shut, making this the largest oil supply shock since World War II. Shipping companies like Norden are now modeling scenarios in which the strait stays effectively closed for the rest of the year, a signal of how entrenched the geopolitical risk premium has become.

The oil shock is reverberating across asset classes and regions. India's central bank and Prime Minister Modi have issued emergency appeals to citizens to avoid gold purchases and cut fuel consumption, highlighting the severity of imported inflationThe rate at which prices rise across an economy. pressures. Peru's government authorized a $2 billion private bailout for state-owned Petroperu to shore up liquidity. China's central bank warned of imported inflation risks from higher oil and commodity prices. Malaysia's pension fund and Indonesia's central bank have moved to defend their currencies as energy import bills spike, compressing emerging-market real yields and forcing capital toward developed markets and USD-denominated assets.

Energy majors are diverging in response. BP's analyst coverage has improved sharply, with buy ratings now piling up as markets reassess energy scarcity and return potential. Mosaic, the fertilizer giant, has failed to benefit from surging input costs, signaling that not all energy-exposed names will profit from dislocation. Airlines face margin pressure as jet fuel tightens; shipping logistics companies are repricing routes around a longer Hormuz closure. Refiners in India, China, and Thailand are scrambling to source crude from Africa and the Americas to reduce Middle East dependence.

The debate centers on whether the impasse is temporary or a structural shift. Morgan Stanley's Matt Hornbach expects a "spicier" US inflationThe rate at which prices rise across an economy. print this week, reflecting April's fuel-price spike. If CPI comes in hot and geopolitics fail to de-escalate, the Fed's rate-cut trajectory could be delayed further, pressuring growth equities and supporting USD and defensive sectors. Conversely, if peace talks resume and Hormuz reopens within weeks, the oil rally could reverse sharply, benefiting importers and hitting energy stocks.