Summary: The U.S. dollar held steady on Monday and was positioned for its strongest monthly rise since July as concern grows over the economic fallout of an extended war in the Middle East. Investors fled to safe-haven assets after the conflict shut the Strait of Hormuz - a vital corridor that handles around one fifth of global oil and gas flows - helping push Brent crude toward its largest monthly increase and unsettling global rate expectations.
Markets reacted to a conflict that began after U.S. and Israeli strikes on Iran on February 28 and has since broadened across the region. Rising anxiety about a possible ground offensive, together with the news that Yemen's Iran-aligned Houthis entered the theater on Saturday, further dampened sentiment. Meanwhile, Pakistan said it was preparing to host "meaningful talks" aimed at ending the conflict in the coming days, even as Tehran warned it was prepared to respond if the United States launches a ground operation.
The dollar found support as investors sought safety this month. The euro traded at $1.1512, leaving it on track for a roughly 2.5% decline in March - its weakest monthly performance since July. Sterling was quoted at $1.32585, largely unchanged on the day but set for a 1.7% decline over the month. The dollar index, which compares the U.S. currency against six major peers, was at 100.14 in early trading.
Market participants noted how rapidly sentiment had shifted. "What stands out is how quickly probabilities have shifted. Only two weeks ago, U.S. boots on the ground in Iran was seen as a low-probability outcome," said Chris Weston, head of research at Pepperstone. "That has clearly changed, reinforcing the need for markets to remain open-minded. In this environment, traders remain defensive. The playbook is to sell rallies in risk and maintain volatility hedges."
Frail yen back in the spotlight
The Japanese yen recovered slightly to 159.97 per dollar after earlier touching 160.47, a level not seen since July 2024 when Tokyo last intervened in currency markets. Japanese officials signalled readiness to act if speculative pressures persist. Top currency diplomat Atsushi Mimura said authorities stand ready to take "decisive" steps should speculative moves continue in the foreign exchange market.
The yen also drew support after remarks from Bank of Japan Governor Kazuo Ueda indicating the central bank was closely monitoring exchange-rate moves and their strong effect on growth and inflation. Strategists at Commonwealth Bank of Australia judged the recent weakening of the yen to be driven by fundamentals rather than mere speculation. "We judge the recent weakening of the JPY as driven by fundamentals rather than speculation," they said. "A direct market intervention will rapidly pull USD/JPY down by a few yen."
Currency weakness extended beyond the yen. The Australian dollar slipped about 0.3% to $0.6851, leaving it on course for a roughly 3.8% drop in March - its steepest monthly fall since December 2024. The New Zealand dollar fell about 0.4% to $0.57275, down 4.4% over the month.
These moves reflect investor concern that continued disruption to oil and gas shipments through the Strait of Hormuz, combined with widening regional hostilities, could feed through to market volatility and alter expectations for global growth and interest-rate paths.
Key points
- U.S. dollar positioned for its strongest monthly gain since July as investors seek safe havens amid escalating Middle East conflict.
- Yen weakened past the 160 level before modestly recovering; Japanese authorities warn they are ready to take decisive action if speculative moves persist.
- Commodity-linked currencies such as the Australian and New Zealand dollars declined, while the euro and sterling also fell over the month.
Risks and uncertainties
- Protracted war in the Middle East - continued disruption could further unsettle global markets and commodity flows, affecting energy and transport sectors.
- Potential for a U.S. ground operation - Tehran's warning that it would respond to such an action increases geopolitical risk and market volatility, with implications for safe-haven demand and oil markets.
- Currency intervention risk - renewed intervention or the threat of intervention by Japanese authorities could abruptly alter currency market dynamics, affecting export-sensitive sectors and international investment flows.