The euro has fully reversed the January rally and has fallen about 1.7% this week. At the same time, the ECB increasingly sees the escalating US-Iran conflict as an upside risk to euro-area inflation through higher energy prices, though officials still view markets as orderly and are not signaling an immediate policy shift. Policymakers broadly suggest they will tolerate temporary energy spikes but could act if inflation expectations begin to drift, leaving near-term euro pricing more sensitive to energy and inflation-expectations data than to growth surprises. Meanwhile, the February ECB minutes confirmed a unanimous decision to hold rates near the 2% inflation target with “full optionality,” an outlook now being tested by rising geopolitical risks.

The yen traded mostly steady in Asia and is only modestly weaker against the dollar year-to-date, though renewed energy security concerns are emerging after Japan was warned of limited support to offset disruptions around the Strait of Hormuz. Given Japan’s heavy reliance on imported energy, higher fuel costs could complicate fiscal expansion plans and add to inflation pressures, with at least one refiner already cancelling March exports amid expectations of higher prices. USDJPY remains pulled between Japan’s energy vulnerability and the Fed-BOJ policy gap, versus safe-haven demand and the risk of official intervention if the yen weakens too quickly. Still, scope exists for yen strength if carry trades unwind and domestic yields rise, while ongoing wage growth and expectations of gradual BOJ tightening continue to support the medium-term outlook for the currency.

The Australian dollar is modestly bid today, recovering roughly half of Thursday’s near 1% drop, though it remains capped below 0.7100. Recent data point to a softer backdrop, with Australia’s January trade surplus narrowing to A$2.6b as exports fell and imports rebounded, while trade with China rose sharply, highlighting Australia’s heavy reliance on China even as the surplus with its largest partner shrinks. Domestically, a modest 0.3% rebound in January consumption—driven mostly by services and essentials—signals cautious households, suggesting demand momentum is cooling and raising the bar for further RBA tightening despite February’s rate hike.