FX Market FY25/26: Protectionist policies weaken USD; Iran war provides boost

The fiscal year from April 1, 2025, to March 31, 2026, was defined by the dramatic implementation, and subsequent legal retraction, of Trump 2.0 trade policies. While the initial Trump Trade of 2024 theoretically anticipated a dominant US Dollar fueled by protectionism, the reality of 2025 saw the greenback struggle against major counterparts as trade tensions and shifting Federal Reserve expectations weighed on sentiment.

The year was anchored by the April 2, 2025, Liberation Day announcement, which introduced sweeping tariffs on nearly all US trading partners. This initially triggered record-breaking market volatility and a flight to safety. However, as 2025 progressed, the US dollar paradoxically weakened, ending the calendar year down roughly 10% against major currencies, such as EUR/USD up 5.11% and AUD/USD up by 10.48%.¹

By early 2026, the narrative shifted again when the Supreme Court struck down the administration's key tariff authority, leading to the cessation of many duties by February 24, 2026.

While 2025 was dominated by central bank pivots and trade policy speculation, the remainder of 2026 could be influenced by a combination of the developments in the Middle East, trade policies speculation, and global central banks interest rate decisions, alongside the traditional market forces.

Data source: Tradingview.com

• The safe-haven pivot (CHF and JPY): While the USD/JPY had been climbing all year, supported by multiple factors including but not limited to interest rate differential (carry trade), reflecting Yen weakness, notice the sharp reversal in late March 2026. As the US commenced military action in Iran at the end of February, concerns about higher oil prices impact on the Japanese economy weighed on the Yen, however, as the cease fire talks continue, and depending on the outcome, the Yen may aim for more ground. The Swiss Franc (CHF) fell by almost 4% against the US dollar in a single month, erasing a third of its annual FY gains.²
  
  
• Energy and commodity correlation: Despite the global "risk-off" sentiment, and due to their historical correlations to energy and commodities, the AUD and CAD initially remained resilient or strengthened against the USD in March 2026. This can be tied to the spike in Brent Crude (surpassing $115/bbl³) and industrial metals following the closure of the Strait of Hormuz.⁴
  
  
• The euro’s reaction: The EUR/USD uptrend which began in early 2025 was halted in early February 2026 and began a downtrend which was further fueled as the war began, mostly attributed to Europe's energy vulnerability.⁵ However, it is important to note that as of mid March, EUR/USD was able to move back higher, close to its pre war levels.

1. The "War Premium" and Energy resources - the war in Iran has impacted the exchange rates for several currencies differently

• CAD and AUD (The energy/metal hedge): With the Strait of Hormuz facing ongoing disruptions, oil and energy prices may remain a challenge, and if that's the case, the historical correlation between Canadian dollar and oil prices can be supportive to the currency. Higher commodity prices may also be supportive to other currencies such as the Australian or the New Zealand dollar.
  
• EUR and GBP (The energy tax): Europe remains highly sensitive to Liquified Natural gas (LNG) supply shocks. If energy costs stay elevated throughout 2026, it is possible for the EUR and GBP to remain pressured. Furthermore, upcoming central bank policy shifts and interest rate decisions throughout the year will be critical in determining the final trajectory of these currency pairs.
  
• Ceasefire: If a true long-term ceasefire holds between the US and Iran, FX exchange rates may return to their supply and demand balancing, however, the extended periods of higher energy prices along with markets exposure to daily political news and events, may impact central banks decisions in the coming months.

2. Divergent Central Bank paths - the "sync" is over. We are potentially entering a period of high policy divergence:

• The Fed (USD): According to the CME FedWatch tool.⁶ The Fed 30-Day Funds futures prices are used to estimate the market's probability of Federal Reserve rate changes at upcoming FOMC meetings. Previously, pre war, the data showed that markets were expecting the Fed to continue a "slow and steady" cutting cycle toward 3.0% by year-end. However, higher energy prices and increased military spending, may have added concerns as the data by mid April 2026 suggests higher chances for a 3.25%-3.5% range by year end.
  
• The ECB (EUR): The ECB is currently in a "good place," holding the main refinancing rate steady at 2.15%, the lowest since December 2022.⁷ The expectations according to the ECB watchtool for ECB to raise rates in 2026, along with a potential FED hold, may provide a yield advantage for EUR/USD in 2026.⁸
  
• The BoJ (JPY): Japan is the wildcard. After years of deflation and Yen weakness, the BoJ, supported by the IMF, is expected to maintain its current trajectory of interest rate hikes.⁹ Theoretically, in a world of geopolitical chaos, if there is demand for the Yen safe-haven status, alongside carry trade repatriation, it may potentially strengthen the currency against its peers.

Footnotes:

1 - http://Tradingview.com

2 - https://www.oanda.com/us-en/trading/instruments/usd-chf/

3 - https://finance.yahoo.com/sectors/energy/articles/oil-remains-above-110-markets-052317747.html

4 - https://www.oanda.com/us-en/trading/instruments/aud-cad/

5 - https://www.oanda.com/us-en/trading/instruments/eur-usd/

6 - https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

7 - https://www.centralbanking.com/central-banks/monetary-policy/monetary-policy-decisions/7974966/ecb-holds-rates-again-despite-below-target-inflation

8 - https://ecb-watch.eu/

9 - https://www.imf.org/en/news/articles/2026/04/02/pr-26105-japan-imf-executive-board-concludes-2026-article-iv-consult