Oil briefly topped $119/barrel at Monday's opening for the first time in four years, before retreating slightly as panic eased. However, such a pullback should not fool anyone: there is no basis for stabilisation in the energy market.

The US dollar also looks reasonably comfortable, but that confidence is purely geopolitical. The war in the Persian Gulf has every chance of becoming protracted, because the US bet on regime change in Iran did not produce the planned result — Mojtaba Khamenei, the son of the late leader, was formally elected the new supreme leader over the weekend, cementing the hardliners' hold on power. Bombardments are intensifying on both sides, and producers have begun to suspend output as shipping through the Strait of Hormuz grinds to a halt.

That explains the dollar's resilience: several advanced industrial economies are critically dependent on external supplies, including Japan, South Korea, China, India, and the whole European Union. A prolonged conflict and a rapid rally in the oil market will trigger capital flight into safer assets — and the dollar is one of those assets for now. In other words, demand for the greenback has risen for reasons that have nothing to do with economic fundamentals.

The expected CFTC report showed a sharp increase in dollar demand after the strikes on Iran: the aggregate net short position in USD versus major world currencies narrowed by a hefty $6.7 billion to -$12.3 billion. The bearish imbalance remains sizeable, but the trend is clearly bullish.

As for the US economy, the picture is grim, and there are no economic reasons for a flight into the dollar apart from one — a sharp rise in inflation risks. Inflation could not stay out of the picture after import costs jumped following the introduction of higher tariffs, and even the Supreme Court's short?term annulment of Trump's initiatives will not change that in the near term. Rising oil prices add a new, even clearer threat to these risks. Trump felt compelled to comment on the obvious on Sunday, in his usual manner, calling himself smart and everyone else fools. "Short-term oil prices that will fall quickly once the Iranian nuclear threat is removed — that's a very small price the US is willing to pay," Trump said, without explaining why he expects the price increase to be short-lived or how he intends to win without a ground campaign and with a limited supply of missiles for mass strikes.

Five-year TIPS yields, which are protected against inflation, jumped sharply by Friday's close to year-highs — one of the most reliable indicators of rising inflation expectations.

Friday's US nonfarm payrolls made the situation even worse, clearly signalling a slide toward recession. Not only did nonfarm payrolls fall by 92,000 in February instead of the 59,000 gain forecast, but the two prior months were revised down by 69,000 combined. That is nothing short of a collapse.

The Federal Reserve will meet again on March 18, and it is anyone's guess how the Committee will assess the situation. The deterioration in the labour market argues for recession, while the spike in inflationary expectations makes matters worse. That is stagflation, the Fed's worst nightmare, and it now looks closer than before.

In the short term, the dollar still retains its strength as a safe-haven asset, but the longer the war lasts without clear signs of resolution in favour of the US and Israel, the greater the chaos that will appear across financial markets.