The Dollar climbed on Monday as rising retaliatory threats in the Middle East dampened risk appetite, boosting demand for safe-haven assets.
Over the weekend, hopes for a de-escalation faded, with US President Donald Trump threatening strikes on Iran’s electricity grid and Tehran promising retaliatory attacks on neighbouring infrastructure.
The International Energy Agency (IEA) chief warned that the crisis is more severe than the combined oil shocks of the 1970s, Reuters reports.
Markets are factoring in the expectation that countries benefiting from a positive energy supply shock will outperform those facing a negative shock. As a result, the Euro and Yen are under pressure. If the conflict persists, these currencies are likely to experience even greater strain.
The Dollar index, which tracks the greenback against a basket of peers, rose 0.29% to 99.83. Last Friday, the index recorded its first weekly decline since the war began, as soaring oil prices stoked inflation and prompted central banks to adopt a more hawkish stance.
The Euro fell 0.38% to $1.1526, the Yen dropped 0.22% to 159.55 per Dollar, and Sterling slid 0.37% to $1.329.
The conflict intensified on Monday, with Israel carrying out extensive strikes on Tehran and Saudi Arabia reporting the launch of two ballistic missiles toward Riyadh.
On Saturday, President Trump renewed threats against Iran, shortly after hinting that the US might consider de-escalating the conflict.
In response, Iran vowed retaliatory attacks on infrastructure in neighbouring countries and declared that the Strait of Hormuz would remain closed.
As the Yen slipped back toward the critical 160-per-Dollar mark, Japan’s top currency official, Atsushi Mimura, cautioned that speculative moves in oil markets could spill over into the foreign exchange market.
Meanwhile, speaking in Sydney, IEA Executive Director Fatih Birol warned that the ongoing crisis represents a significant threat to the global economy, exceeding the impact of the Middle East oil shocks of the 1970s.
Major Asian equity markets plunged, with Japan’s Nikkei falling as much as 5% at one point. Inflation worries also rattled global bond markets, sending Japanese government bonds sharply lower and pushing the 10-year US Treasury yield to a near eight-month high of 4.415%.
Before the US-Israeli conflict with Iran erupted in late February, investors had expected two interest-rate cuts from the Federal Reserve this year. Now, even a single cut appears unlikely, as other major central banks adopt increasingly hawkish stances.
Elsewhere, the European Central Bank held interest rates steady on Thursday but cautioned that energy-driven inflation remains a concern. The Bank of England also kept rates unchanged, while the Bank of Japan indicated that a rate hike could come as early as April.
Moreover, the Australian Dollar fell 0.95% against the US Dollar to $0.6956 at the time of writing, and New Zealand’s Kiwi edged down 0.7% to $0.5793.