Currency markets face a prospect of intensified volatility as strategists evaluate three discrete energy-outcome scenarios linked to the current Middle East conflict. Morgan Stanley's recent impact assessment ties potential moves in the U.S. Dollar and the Euro to how much disruption occurs across the global oil complex.
The bank frames the outlook around three paths - a near-term resolution, a managed escalation that resembles current conditions, and a severe disruption that would choke energy supplies. Each scenario carries distinct implications for major exchange rates and for groups of currencies across the G10 and CEE regions.
Near-term resolution: If hostilities ease quickly, Morgan Stanley projects a material reduction in the dollar's safe-haven premium. In that setting the U.S. Dollar Index (DXY) could retrace around 0.6% back toward the more tranquil price and volatility levels observed last month. The euro would benefit; EUR/USD is seen climbing to about 1.18 under this favorable outcome. A de-escalation would also likely spur a pronounced rally in Central and Eastern European currencies, with the Polish Zloty (PLN), Hungarian Forint (HUF) and Czech Koruna (CZK) expected to outperform as risk appetite returns.
Managed escalation - the neutral case: Current exchange rate levels are broadly consistent with Morgan Stanley's middle-path scenario. Here Brent crude would trade roughly around $90 per barrel, and equity and volatility readings would remain somewhat elevated - the VIX is noted as slightly above the current figure of 29.49. Under this neutral outcome the dollar would only weaken marginally and risk-sensitive currencies would make modest gains. Within the G10, the bank expects the Swedish Krona (SEK) and the Euro to register steady but capped appreciation, while longer-established havens such as the Japanese Yen (JPY) and the Swiss Franc (CHF) would likely underperform.
Severe disruption and the 1.13 floor: A major hit to energy supplies would darken the backdrop and trigger a pronounced flight to quality, boosting the greenback. Morgan Stanley's analysis projects EUR/USD could decline by about 2.1%, moving toward the 1.13 handle. The Swiss Franc is identified as the main beneficiary of such dollar strength. Commodity-exporting currencies including the Canadian Dollar (CAD) and the Norwegian Krone (NOK) are expected to register only limited gains in this stress scenario. The Swedish Krona stands out as the clearest underperformer among G10 currencies. In the CEE region, the Polish Zloty and Hungarian Forint are singled out as likely leaders of the losses, pressured by higher energy costs and their geographic proximity to the geopolitical risk.
Overall, the bank's framework ties FX trajectories tightly to energy market outcomes. Stakeholders across currency markets, commodities, and economies exposed to high energy imports or close geographic risk will be watching developments in supply and volatility readings closely.