The U.S. Dollar rose sharply in early Asian trading Monday, as markets reacted to the weekend’s exchange of strikes between the United States and Israel against Iranian targets. The dollar’s advance, alongside gains for the Japanese yen and Swiss franc – traditionally considered safe-haven currencies – signals heightened investor anxiety over a potential escalation of conflict in the Middle East.
The risk-sensitive Australian dollar fell 1.1% to $0.7035, reflecting a broader move away from assets perceived as carrying greater risk. Oil markets are also under pressure, with concerns mounting over potential disruptions to supply through the Strait of Hormuz, a critical waterway for global energy shipments. Several oil majors and trading firms have already suspended shipments through the strait, according to Reuters reports.
President Donald Trump stated the strikes were intended to eliminate a security threat and provide an opportunity for Iranians to challenge their leadership. The attacks prompted Gulf nations to raise their alert levels, anticipating further escalation. Brent crude was trading near $73 per barrel on Friday, its highest level since July, and has already seen significant gains this year. Economists at Capital Economics suggest Brent could climb to $80 per barrel even if tensions remain contained, but warn a prolonged disruption could push prices towards $100, potentially adding 0.6–0.7 percentage points to global inflation.
The dollar’s gains, while noticeable, were described by ING analysts as “perhaps not as much as traders might have expected historically,” despite the geopolitical shock. They emphasize the primary transmission mechanism for this risk is the oil price, but noted the dollar’s traditional correlations have been disrupted. Citi’s currency strategy team questioned whether the USD’s safe-haven relationship was resuming, noting its outperformance against all but the Swiss franc and Japanese yen in early Friday trade.
However, the dollar’s recovery is complicated by ongoing trends toward de-dollarization in currency markets and asset allocations. A Bank of America currency survey, conducted prior to the Israeli attack, indicated that short positions on the dollar remained a “crowded trade,” but conviction in those shorts was still largely intact. The dollar’s recent weakness had been fueled by expectations of earlier interest rate cuts from the Federal Reserve following a tame CPI print, but the surge in energy prices has reversed that momentum.
Financial markets are bracing for continued volatility as the situation unfolds. The U.S. And Israel’s actions have triggered fears of a wider regional conflict, with Iran retaliating by launching missiles towards Israel. The immediate impact is being felt in energy markets, but the broader implications for global financial stability remain uncertain.
