After a year-long bearish stance, JPMorgan Chase announces: Tactical shift to bullish on the US dollar!

Ask AI · JPMorgan shifts to a bullish view on the dollar. What is the deeper meaning behind this tactical adjustment?

The surge in oil prices triggered by the closure of the Strait of Hormuz has brought the term “stagflation” back onto traders’ screens, signaling a bullish outlook for the dollar. JPMorgan has made two position jumps in less than three weeks: on March 2, from bearish to neutral, and now back to a tactical bullish stance, completely abandoning a year-long dollar bearish position.

According to the Trend Trading Desk, the core logic behind this shift, as explained by JPMorgan FX strategist Meera Chandan in the latest report, is quite straightforward: this is not based on a judgment about the geopolitical conflict’s direction but a form of “cautious insurance.” Once energy shocks and stagflation pressures persist, and both stocks and bonds come under pressure, the dollar is the most effective hedge. Meanwhile, if market sentiment continues to worsen, the “American exceptionalism” narrative could resurface, further supporting the dollar.

The transmission pathway of this energy shock shows a clear “importer/exporter” divide in exchange rates. Energy-exporting currencies like the dollar, AUD, CAD, and Norwegian krone are expected to benefit; the eurozone currencies face larger empirical shocks than Asia, but the yen’s absolute decline is usually the most pronounced. The eurozone’s terms of trade have already collapsed, natural gas inventories are below seasonal norms, and EUR/USD fair value has been pushed down to 1.10–1.13, the lowest since July 2025.

However, JPMorgan also clearly defines the boundaries of this shift: it is a tactical adjustment, not a permanent change in stance. Most currencies’ medium-term forecasts remain unchanged, only with increased risk bias toward dollar appreciation. The new macro portfolio trade involves buying an equally weighted basket of USD against EUR, SEK, GBP, and NZD.

The logic for the dollar turning bullish is defensive demand, with different trajectories under four scenarios

When the Strait of Hormuz closure news emerged on March 2, JPMorgan had already shifted from bearish to neutral. This time, the core reason is: stagflation pressures have rendered bonds and stocks simultaneously ineffective as hedges, and the dollar fills this gap.

Historical data supports this: periods when risk parity portfolios underperform are highly correlated with dollar strength. JPMorgan’s quantitative model TEAM currently ranks the dollar as the top-scoring currency—real yields, nominal yields, and relative stock momentum signals have all reversed, with only valuation remaining weak. Additionally, the dollar’s correlation is currently around 60, in the high end of its historical range, providing an entry point for subsequent de-correlation trades.

JPMorgan summarizes four scenarios in the report:

Scenario 1: Extreme escalation (low probability) Deep deterioration of geopolitical tensions, Azerbaijan’s natural gas supply disruption, and a full risk-off market. The dollar surges, DXY up 4.6% to 103.7, EUR/USD drops to 1.10; energy-exporting currencies (CAD, NOK) outperform, while high-energy-dependence currencies (SEK, GBP) are under pressure. Energy prices spike, TTF surpasses €80/MWh, Brent crude rises to $100–120+ per barrel.

Scenario 2: Hormuz disruption (medium probability) Shipping through the Strait of Hormuz halts until summer, with market impact similar to the extreme scenario but less severe. The dollar strengthens, DXY up 3.4% to 102.6, EUR/USD remains in the 1.10–1.13 range; TTF rises to €60–70/MWh, Brent crude climbs to $100–120.

Scenario 3: Partial normalization (high probability) Shipping partially recovers within three weeks, with traffic returning to 70%, aligned with current market expectations. The dollar weakens, DXY down 1.1% to 98.1, EUR/USD rises to 1.17; energy-importing currencies (GBP, EUR, JPY) strengthen, CAD reverts to a funding currency. TTF falls to €40–45/MWh, Brent drops to $70–80.

Scenario 4: Full normalization (medium probability) Shipping fully recovers, Iran sanctions are lifted, risk premiums vanish, and the market moves in line with partial normalization but more strongly. The dollar weakens significantly, DXY down 3.5% to 95.8, EUR/USD rises to 1.20; TTF drops to €30/MWh, Brent falls below $60, approaching recent lows.

Euro and Pound have two different decline paths, and the yen intervention threshold has actually risen

Specifically, the euro faces quantitative pressure. The eurozone’s terms of trade have collapsed, natural gas inventories are below seasonal norms, and real interest rates have deteriorated sharply. These factors have pushed EUR/USD fair value down to 1.10–1.13, the lowest since July 2025. Nominal interest rates are tilted toward the euro, but cannot offset the deterioration in real rates. The Q2 target is lowered to 1.17, with a year-end target of 1.20, but JPMorgan explicitly states that this year-end target “reflects insufficient visibility rather than confidence,” with downside risks clearly larger.

The pound’s situation is more complicated. JPMorgan has shifted from a tactical bullish to bearish view, with GBP/USD target sharply lowered from 1.41 to 1.34. The reasons are twofold: UK manufacturing PMI has been more negatively impacted than most G10 economies; simultaneously, the stagflation-like rise in UK bond yields will not support the pound, as high interest rates in a stagflation environment scare away capital rather than attract it. The May 7 local elections (which could trigger leadership changes) add political tail risks. GBP is already overvalued relative to its energy dependence implied level, leaving room for further decline.

The outlook for the yen is the most certain in the report—maintain a bearish view, USD/JPY at 158 in Q2, 164 by year-end. Rising energy prices directly worsen Japan’s trade balance, the main transmission channel. More subtly, since this USD/JPY rally is mainly driven by broad dollar strength, the justification for Japanese Ministry of Finance intervention to weaken the yen diminishes—intervening to weaken the yen makes sense, but intervening to curb dollar appreciation does not, raising the intervention threshold above previous expectations.

Norwegian krone, AUD diverge, and RMB remains relatively stable

The Norwegian krone is the G10 currency most benefited by the energy shock, with improving trade terms, the Norges Bank leaning hawkish, and EUR/NOK breaking above multi-year support levels, which JPMorgan believes can be sustained. Norges Bank FX purchases have turned negative this year (around 800 billion NOK daily), providing structural support. JPMorgan’s quantitative model ranks NOK’s inflation momentum as the second strongest among G10 currencies, directly supporting a hawkish stance.

The Australian dollar’s logic is more nuanced. The AUD/USD target for Q2 remains at 0.73, based on the fact that the AUD’s commodity beta has recovered over the past year, and the effect of commodity trade conditions has become “effective” again—something that did not happen from 2022 to mid-2025 when the correlation between stocks and bonds was distorted, keeping commodity-sensitive currencies under pressure. Australian domestic inflation remains above RBA targets, with markets pricing in a 70% chance of rate hikes.

China is one of the least affected major economies by this round of global energy shocks. Its reliance on oil and gas imports is relatively low, its domestic power structure is diverse, and foreign holdings in Chinese assets are light, reducing capital outflow pressures. The Q2 USD/CNY target remains at 6.85. Historical relationships between oil price increases and the trade-weighted RMB exchange rate show that CNY often does not depreciate significantly during energy price surges.