US Dollar Surges to Five-Week High as Middle East Conflict Escalates

US Dollar Surges to Five-Week High as Middle East Conflict Escalates

Euro and sterling retreat while safe-haven currencies rally amid geopolitical tension

The US dollar climbed to a five-week high on Monday after military strikes by the United States and Israel on Iran heightened global risk aversion and triggered demand for safe-haven assets.

The Dollar Index, which measures the greenback against a basket of major currencies, rose 0.6% to 98.187 — its strongest level since late January. The move reflects growing investor anxiety over the potential for prolonged conflict and rising energy prices.

Why the Dollar Is Rising

The currency rally follows coordinated US and Israeli strikes on Iran over the weekend, with retaliatory attacks reported across Israel and parts of the Gulf region. President Donald Trump indicated further action could continue “for as long as necessary”, reinforcing fears of escalation.

Analysts highlight three key drivers behind the dollar’s strength:

• Energy exposure differences: The US is largely energy independent, while Europe and parts of Asia rely heavily on imported oil and gas. Rising energy prices therefore tend to weigh more heavily on European and Asian currencies.
• Federal Reserve policy expectations: Markets are reassessing the likelihood of US interest rate cuts this year. Fed funds futures moved lower, suggesting investors believe the Federal Reserve may delay or reduce the number of rate cuts if inflationary pressures increase.
• Capital flows: Higher energy prices and reduced expectations of rate cuts could reverse recent portfolio flows into emerging markets, strengthening demand for the dollar.

For currency traders, the dollar’s resilience reinforces its role as a global reserve currency during periods of geopolitical stress.

Euro and Sterling Under Pressure

The euro and pound both fell sharply as energy concerns mounted.

• EUR/USD dropped 0.6% to 1.1741, as investors reassessed Europe’s vulnerability to higher oil prices.
• GBP/USD fell 0.8% to 1.3375, with sterling pressured by broader risk aversion and concerns over imported energy costs.

Higher energy prices could weigh on European industrial recovery and slow economic momentum, potentially limiting the European Central Bank’s flexibility on interest rates.

Unless tensions ease quickly, analysts suggest the euro could test lower technical levels in the near term.

Swiss Franc Strengthens as Safe-Haven Demand Rises

The Swiss franc surged to its strongest level against the euro in over a decade, reflecting its traditional safe-haven appeal.

The move may complicate policy decisions for the Swiss National Bank, as excessive currency strength can weigh on exports. Markets are now speculating whether Switzerland may reintroduce negative interest rate measures if appreciation continues.

Yen Weakens as Oil Prices Jump

While the Japanese yen is often viewed as a defensive currency, it weakened against the dollar, with USD/JPY rising 0.7% to 157.07.

Japan’s heavy reliance on imported energy means higher crude prices could worsen its trade balance. In addition, increased uncertainty may prompt the Bank of Japan to adopt a more cautious stance on rate hikes.

How This Could Affect Share Prices

Currency volatility and rising oil prices can have significant implications for equity markets:

• Energy stocks may benefit from higher crude prices.
• Airlines and transport firms could face margin pressure from rising fuel costs.
• US exporters may struggle if a stronger dollar makes goods less competitive abroad.
• Emerging market equities could see outflows as investors seek safer assets.

A prolonged conflict could also increase inflationary risks globally, potentially delaying central bank easing cycles and weighing on growth stocks.

Market Outlook

The dollar’s surge underscores how quickly geopolitical events can shift financial markets. Investors will closely monitor developments in the Middle East, oil price movements and Federal Reserve commentary in the days ahead.

If tensions escalate further, safe-haven flows into the dollar and Swiss franc may continue. However, any sign of de-escalation could prompt a sharp reversal in currency markets.

For now, volatility remains elevated, and global investors are bracing for further market swings.

Sources: (Investing.com, Reuters.com)