Global currency markets leaned toward safety on Friday as the U.S. dollar advanced toward multi-month peaks, driven by renewed unease over an escalating Middle East war and growing skepticism about a near-term diplomatic resolution. The moves came after another turbulent week in markets, with officials in Washington and Tehran issuing sharply different versions of progress on talks and U.S. leadership extending a temporary pause on strikes against Iran's energy facilities into April.
Investor concerns deepened after media reports said the Pentagon is examining plans to deploy as many as 10,000 additional ground troops to the Middle East, a development that offered little comfort to market participants hoping for an imminent de-escalation of hostilities. That combination of geopolitical risk and the prospect of sustained higher energy prices kept demand strong for the dollar as a safe-haven currency.
"It doesn’t look like the conflict will end anytime soon," said Carol Kong, a currency strategist at Commonwealth Bank of Australia. "The dollar is king while this conflict lasts." She added: "If we’re right about this conflict being protracted, I think oil prices will just keep rising and it will push the dollar higher, at the expense of net energy importers like the Japanese yen and the euro."
Against the yen, the dollar hovered close to the 160 level, trading at 159.61. The euro slipped slightly, down 0.03% to $1.1525, while sterling eased 0.05% to $1.3325. Risk-sensitive currencies felt the strain: the Australian dollar tumbled to a two-month low of $0.68722, and the New Zealand dollar traded near its weakest since January, at $0.5754, down 0.15% on the day.
Measured against a basket of major currencies, the dollar was marginally higher at 99.93, and was on course for a roughly 2.3% gain for the month - a rise that would mark its largest monthly advance since July last year. Market participants have also re-priced the outlook for U.S. monetary policy: the CME Fedwatch tool shows investors now put a 46% probability on a 25-basis-point rate increase by the Federal Reserve by December, a sharp reversal from the more than 50 basis points of easing that had been expected prior to the outbreak of the war.
The shift toward a more hawkish rate outlook has not been confined to the United States. Expectations are building that the Bank of England and the European Central Bank could also move toward tightening policy, a hawkish sea change that has put pressure on government bonds and pushed yields higher.
Analysts at Capital Economics warned of a wider economic impact if energy supply disruption persists: "A more prolonged disruption to energy supplies would deliver a larger hit to activity that would meet most definitions of a global recession and prompt a broader monetary tightening cycle." Those concerns were reflected in U.S. Treasury yields, which were steady on Friday after a sharp rise the previous night. The two-year yield stood at 3.9776%, while the benchmark 10-year yield eased slightly to 4.4097%.
With markets on edge, traders are weighing the combined implications of rising energy prices, potential troop increases and uneven diplomatic signals. The immediate effect has been to steer capital toward perceived safe-haven assets and to raise the probability that central banks will face pressure to keep policy tighter for longer should energy costs remain elevated.
Summary of market moves:
- U.S. dollar strengthened toward multi-month highs amid Middle East tensions.
- Yen approached 160 per dollar at 159.61; euro and sterling edged lower.
- Risk-sensitive currencies such as the Australian and New Zealand dollars fell to recent lows.
- Investors priced in a greater chance of a Fed hike by year-end; bond yields rose.