Escalating tensions in the Middle East have triggered significant market reactions, with both the Swiss Franc (CHF) and New Zealand Dollar (NZD) responding to developments involving the US and Iran. The USD/CHF pair depreciated after four days of gains, trading around 0.7990 during Asian hours on Thursday, as the US Dollar struggled despite increased risk aversion. However, the downside for USD/CHF may be limited as safe-haven demand for the US Dollar could rise due to ongoing conflict in the region [1]. The Islamic Revolutionary Guard Corps (IRGC) announced an immediate, total closure of the Strait of Hormuz to all commercial and oil vessels, warning that any transit attempts would be targeted. This follows US airstrikes in Iran, Iranian retaliatory attacks on US military facilities in Bahrain, Jordan, and Kuwait, and warnings from President Donald Trump of severe military action if an interim peace deal is not finalized [1][2].
Iran’s joint military command stated its armed forces will give a "crushing and decisive" response to any US aggression, while President Trump vowed further strikes and criticized Iran for delaying peace talks. Bahrain, Jordan, and Kuwait reportedly intercepted Iranian missiles and drones aimed at US military facilities on Thursday, according to Reuters [2]. These developments have heightened fears of a wider conflict, which could boost the US Dollar as a safe-haven currency and weigh on riskier assets like the New Zealand Dollar [2].
US inflation accelerated in May, with the Consumer Price Index (CPI) rising 4.2% year-over-year, up from 3.8% in April, matching market expectations. Core CPI ticked up to 2.9% from 2.8% [1][2]. The Iran war has pushed up energy prices, contributing to the fastest pace of inflation in more than three years [2]. Following the hot inflation report, market expectations have shifted sharply: traders have fully priced in a 25-basis-point hike in December, a reversal from previous expectations of two rate cuts this year before the Iran war erupted at the end of February [2].
Swiss lawmakers are considering a proposal to soften capital requirements on UBS, which, if implemented, could reduce the bank's burden by billions of dollars. The original draft law would have required UBS to fully back its foreign subsidiaries with 100% Common Equity Tier 1 (CET1) capital, necessitating an estimated $20 billion raise. If the new pitch is adopted, it could have a short-to-medium-term weakening effect on the Swiss Franc [1]. Market attention is now focused on the upcoming release of the May Producer Price Index (PPI) and Initial Jobless Claims [1].
CONCLUSION
The US-Iran conflict has intensified risk aversion, boosting safe-haven demand and driving up US inflation, which has led markets to price in a rate hike instead of cuts. Currency markets are reacting strongly, with the Swiss Franc and New Zealand Dollar both impacted by geopolitical developments and shifting monetary expectations. The closure of the Strait of Hormuz and retaliatory attacks underscore the high market impact and ongoing uncertainty.