Coping with a Massive Oil Price Shock – Currency Thoughts
Coping with a Massive Oil Price Shock
March 12, 2026
Tomorrow will mark just two weeks since the start of the latest Middle Eastern war. At $94.10, the current price of West Texas Intermediate oil is 7.8% higher than yesterday, 45% above its pre-conflict level, and 71% greater than the recent low in December. This movement remains significantly smaller than the near-quadrupling of price that occurred in 1974 and still doesn’t match the rough doubling that occurred after Iran’s Islamic revolution in 1979 and Iraq’s invasion of Kuwait at the start of August 1990. But those changes took longer than this most recent 2-week surge. With the latest war escalating by the day, the International Energy Agency today called this “the largest supply disruption in the history of the global oil market.” The great miscalculation of the geopolitically motivated venture of President Trump and Prime Minister Netanyahu was to not anticipate Iran’s response, which rather than duking things out between themselves has been instead focused on stopping the flow of all Middle Eastern oil and thereby driving up the price of energy to painfully high levels. The other, more predictable planning mistake was to underestimate the length of the operation and to plan a stability-inducing exit strategy.
Financial markets are likewise have a hard time finding a new equilibrium. The dollar, still king of the refuge reserve currencies, has been a pretty consistent winner in this maelstrom, gaining another 0.2% in weighted terms overnight.
A great irony has surrounded the reaction of long-term interest rates. In the first year of his second term, President Trump launched a multi-pronged harassment of the Federal Reserve, aimed at achieving his goal of a deep and broad-based drop in borrowing costs to stimulate U.S. business investment and to lighten the servicing burden of the federal deficit. His war of regime change in Iran is undermining that whole effort and threatens to produce an interest rate landscape far less constructive than had he simply allowed the central bank to conduct a credibly independent and competent job of managing monetary policy to achieve price stability and maximize employment. The ten-year U.S. Treasury yield is now over 20 basis points above its pre-war level. In other major economies, the 10-year sovereign debt yields just today has risen another five basis pints in the U.K., four bps in Italy, three bps in France and Spain, and one basis point in Switzerland and Germany.
As risky assets, stock markets have borne the brunt of elevated and fearful uncertainty. Today, stock markets closed down 1.5% in Taiwan, 1.3% in Australia, 1.1% in India and 1.0% in Japan. Share prices in the major European economies show losses so far today that range from -0.6% in the U.K. and Germany to -1.4% in Italy. The DOW, Nasdaq, and SPX are 1-1.2% lower, and the small-cap Russell 2000 shows an even bigger drop so far today. All their net gains and more during the opening two months of 2026 are gone.
Today’s changes in price of gold, silver and Bitcoin so far amount to -0.2%, +1.0% and -0.1%.
In leaving its policy interest rate unchanged at 5.75%, the National Bank of Serbia as proved a thoughtful indication of the current challenge to monetary authorities that the Middle Eastern war presents:
The Executive Board emphasizes that it will continue to pursue a cautious monetary policy, primarily bearing in mind geopolitical tensions and the conflict in the Middle East, the impact of these events on growth in global prices of energy and other primary commodities, as well as on uncertainty indicators. The scale and length of this supply-side shock are hard to predict, as are its effects on global inflation. What can be assumed at the moment is that the major hike in international crude oil prices will also be reflected in the movement of petroleum product prices at home. Also, current global developments may additionally affect supply chains, investment and consumer confidence, and goods and capital flows because they were experiencing pressure even before the latest crisis broke out, due to the rising protectionism in the world’s largest economies. As for monetary policy decisions by leading central banks, the Middle East conflict has increased uncertainty regarding the outlook for the US and European inflation and economic activity, and hampered the assessment of future monetary policy decisions by the Fed and the European Central Bank.
Serbian consumer price inflation for February was coincidentally reported as well today, a 2.5% year-on-year reading just marginally above January’s 58-month low and still in the lower half of the central bank’s 1.5-4.5% target range. Serbia’s central interest rate underwent three 25-basis point cuts from June to September 2024 but has not been changed since then.
the key one-week repo rate of the Central Bank of Turkey, which had been slashed at five straight reviews from 46.0% to 37% as of January was this time left unchanged at the lower level. Political interference with monetary policy in Turkey earlier this decade played havoc with the country’s pace of inflation, that hit peaks of 85.5% in October 2022 and 75.5% in June 2024 sandwiched around a brief trough of 38.2% in June 2023. Last month’s reading of 31.53% on-year rise of consumer prices was almost a percentage point above 30.65% in January.
U.S. data released today included
- A greater-than-projected narrowing of the trade deficit to $54.5 billion in January from $72.9 billion in December but close to last quarter’s average shortfall of $53.3 billion. The 2025 deficit of $912 billion was actually above $903 billion the year before.
- Low new jobless insurance claims of 213k last week and averaging 212k over the past four weeks provides further confirmation that the labor market, while much softer in 2025 than 2024, has been lately stable and not consistent with a drift into recession.
- Housing starts rose 7.2% in January to an 11-month high, but permits fell 6.4% to a 5-month low.
Canada’s 11th trade deficit in the past 12 months equaled C$ 3.65 billion in January, four times greater than consensus expectations. The C$ 31,3 billion deficit in 2025 was likewise four times bigger than in 2024.
Consumer price inflation reported today accelerated to an 1-month high of 3.2% last month in India, around midway between the record low of 0.25% last October and the 2022 peak of 7.8% hit that April. Sweden confirmed that total and core CPI inflation in February of 0.5% and 1.7% (a 14-month low) were the same as the preliminary estimates reported earlier this month. In January total inflation has also been 0.5%. Irish CPI inflation of 2.7% in February matched January’s 4-month low.
Czech industrial production fell 2.6% in January, their deepest monthly decline in 31 month that trimmed the year-on-year rise to a 3-month low of 2.8%. Retail sales in the Czech Republic during January posted rises of 1.0% on month and 5.0% on year.
Copyright 2026, Larry Greenberg. All rights reserved.
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