Dollar Rises as Middle East Tensions Escalate: Forex Market Impact

The dollar appreciated Monday as escalating threats of retaliation in the Middle East sent shockwaves through equity markets and fueled demand for safe-haven assets. Intensifying tensions followed a weekend that saw diminishing hopes for de-escalation, with U.S. President Donald Trump threatening strikes against Iranian infrastructure and Tehran vowing to target the infrastructure of its neighbors.

Adding to the alarm, the head of the International Energy Agency stated the current crisis surpasses the combined impact of the oil shocks of the 1970s. This assessment contributed to a risk-off sentiment that bolstered the dollar’s position.

“The market is embracing the idea that countries and economies benefiting from a positive energy supply shock are likely to outperform those experiencing a negative one,” said Rodrigo Catril, a currency strategist at National Australia Bank, in a podcast. “That’s why we’re seeing the euro and the yen struggle.”

The dollar index, which measures the U.S. Currency against a basket of major currencies, rose 0.6% to 100.12. The index had previously recorded its first weekly decline since the start of the war, as inflationary pressures from surging crude oil prices prompted central banks to adopt a more hawkish stance, supporting other currencies.

The euro fell 0.7% to $1.149 Monday. Simultaneously, the yen weakened approximately 0.2% to 159.6 per dollar, renewing its approach to the critical 160 level, which has currency traders on alert for potential intervention. Atsushi Mimura, Japan’s top currency official, stated the government was prepared to take necessary measures to counter currency volatility, suggesting it could be linked to speculative transactions in oil futures contracts.

Sterling depreciated 0.6% to $1.327, partially reversing initial losses as traders factored in expectations of four rate hikes from the Bank of England this year.

The conflict continued to escalate Monday, with Israel announcing large-scale strikes on Tehran, although Saudi Arabia reported the launch of two ballistic missiles towards Riyadh. Trump issued his latest threat against Iran Saturday, less than a day after hinting at a possible de-escalation. Iran asserted that the Strait of Hormuz, a strategically vital oil passageway, would remain closed.

“Oil prices remain well supported, with Brent holding above $110 a barrel, and a broad ‘sell-everything’ move is affecting stocks, bonds, and precious metals,” highlighted Francesco Pesole, a FX strategist at ING. “Here’s an ideal environment for the dollar.”

Major stock indices in Europe and Asia plummeted, with the Japanese Nikkei losing as much as 5% during the session. U.S. Stock futures similarly declined.

The Australian dollar, often viewed as a barometer of global growth sentiment, fell 1.3% against the greenback to $0.693. Inflationary concerns also gripped global bond markets, with the yield on the U.S. 10-year Treasury climbing to a nearly eight-month high of 4.429%.

Prior to the outbreak of conflict involving the U.S., Israel, and Iran in late February, investors had anticipated two rate cuts from the Federal Reserve this year. Now, even a single cut is considered unlikely, while other major central banks are signaling a more restrictive monetary policy.

“If markets price in a tightening cycle in the U.S., we believe the dollar will strengthen significantly against all currencies,” wrote Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

The European Central Bank held its rates steady Thursday, while warning of inflation fueled by energy prices. The Bank of England also opted to maintain the status quo, while the Bank of Japan left the door open to a potential hike in April.

In cryptocurrency markets, Bitcoin rose 0.65% to $68,630.