TOKYO, March 23 - The U.S. dollar was positioned to recover on Monday after a surge in geopolitical tensions in the Middle East dented risk appetite and prompted renewed buying of safe-haven assets.
Markets had closed out the previous week with the dollar’s first weekly drop since the outbreak of conflict in Iran. That retreat followed concerns that higher oil prices could feed into inflation, prompting central banks to adopt a firmer tone. As risk sentiment weakened into Monday, currencies perceived as more exposed to economic slowdown and inflation pressures struggled, while haven demand lent support to the greenback.
Equity markets were expected to open lower, and the Australian dollar dipped in early trading. The region’s political outlook worsened over the weekend after hopes for a de-escalation in hostilities faded. U.S. President Donald Trump warned he might target Iran’s electricity grid, while Tehran vowed it would strike the energy and water systems of neighbouring countries in retaliation.
Those developments reinforced a market view that countries benefiting from a positive energy supply shock could fare better than those hit by negative shocks, according to Rodrigo Catril, a currency strategist at National Australia Bank. Catril said on a podcast that the euro and the yen were showing signs of strain and that, if the conflict continued for an extended period, such currencies could be more adversely affected.
On the data, the dollar index - which tracks the greenback against a basket of major currencies - ticked up 0.03% to 99.53. The euro eased 0.06% to $1.1563. The Japanese yen strengthened 0.06% to 159.11 per dollar, while sterling weakened 0.06% to $1.3331.
President Trump’s latest threat came less than a day after he suggested the U.S. might be contemplating a scaling back of the conflict. Iran, in turn, announced plans for retaliatory strikes on infrastructure in neighbouring states and indicated that the Strait of Hormuz - a crucial shipping lane for oil - would remain closed. The exchange of threats raised the spectre of tit-for-tat attacks on civilian infrastructure, which carries the risk of disrupting services that millions rely on, including desalination plants that supply water.
Air raid sirens were reported across Israel in the early hours of Sunday, warning residents of incoming missiles from Iran.
Before the U.S.-Israeli war on Iran began in late February, investors had priced in two cuts by the Federal Reserve this year. That outlook has shifted markedly: market participants now see even one cut as a distant prospect, while other major central banks have adopted firmer stances.
Last week the Fed left interest rates unchanged as expected; Chair Jerome Powell cautioned that it was premature to determine the scope and duration of the war’s economic impact. The European Central Bank also held rates on Thursday but highlighted inflationary risks stemming from energy prices. The Bank of England kept rates steady, and the Bank of Japan signalled it could consider a rate increase as soon as April.
Market indicators reflected the elevated tension. Equity futures pointed to a sharp fall in Japan’s Nikkei index, while the yield on the 10-year U.S. Treasury climbed to a near eight-month high of 4.4055%.
Commodity-linked and risk-sensitive currencies showed mixed moves: the Australian dollar weakened 0.17% against the U.S. currency to $0.7011, and New Zealand’s kiwi edged 0.03% lower to $0.5832.
In the crypto market, bitcoin slipped 0.41% to $67,900.41, and ether declined 0.26% to $2,053.17.
Market context
The combination of renewed geopolitical risk, higher energy prices and a shifting central bank outlook has created an environment in which investors reassess expectations for monetary policy and growth. That reassessment has been reflected in currency movements, bond yields and equity futures across the globe.
Note: The article reports market moves and statements as they were provided; no additional or speculative developments are included.