Iran-Israel: What is the potential impact to USD and global economy

Macquarie analysts suggest the Iran-Israel conflict's market impact remains limited due to the absence of U.S. intervention, averting a broad risk-off reaction; however, U.S. military action, particularly against Iran's nuclear infrastructure, could trigger oil price spikes, stagflation fears, and an initial dollar surge. While their base case anticipates a high bar for U.S. strikes, deeper U.S. involvement that "doesn't work out" could ultimately weaken the dollar, drawing parallels to the post-9/11 period.

Analysis

Macquarie analysts assess that the Iran-Israel conflict has, to date, exerted a limited effect on global markets, primarily because the U.S. has not intervened militarily, thereby preventing a broad risk-off reaction in equities and currencies. The firm highlights that without direct U.S. involvement, there is no immediate threat to the global economy from oil supply disruptions. However, the situation could escalate significantly if the U.S. were to take military action, particularly against Iran's nuclear infrastructure. Such an eventuality is projected to cause sharp spikes in oil prices, exacerbate existing stagflationary fears, and initially strengthen the U.S. dollar due to safe-haven demand. Macquarie's base case scenario posits a high threshold for U.S. military strikes, citing domestic aversion to prolonged foreign entanglements. Nevertheless, if U.S. involvement were to deepen and prove unsuccessful, Macquarie warns of potential significant and sustained U.S. dollar weakness, drawing parallels with the dollar's performance following the post-9/11 period. The analysts conclude that even worst-case scenarios could initially lead to a stronger dollar from haven-seeking, followed by an extended period of dollar weakness. The overall market sentiment is moderately negative and uncertain, with a market impact score of 0.7 indicating a potentially significant effect should the risk factors materialize, driven by themes of geopolitics, energy markets, currency fluctuations, and investor sentiment.

Key Decisions for Investors

• Investors should closely monitor any signs of U.S. intervention in the Iran-Israel conflict, as this is pinpointed as the primary catalyst for significant market shifts.
• Consider strategies to hedge against potential oil price volatility and increased stagflationary pressures, particularly if U.S. military action appears more probable.
• Evaluate currency exposures, especially to the USD, given Macquarie's outlook for initial strength followed by potential long-term weakness contingent on the nature and outcome of U.S. involvement.
• Given the prevailing uncertainty and moderately negative sentiment, maintain a cautious stance and potentially prioritize capital preservation until there is greater clarity on the geopolitical trajectory.