Dollar Edges Higher as Middle East War and Oil Supply Risks Keep Markets on Edge

BY COMFORT OGBONNA

The U.S. dollar strengthened slightly on Tuesday as investors adopted a cautious stance amid continued conflict in the Middle East and uncertainty surrounding the possibility of diplomatic progress between the United States and Iran.

Market sentiment remained fragile even after Donald Trump delayed planned military strikes on Iran’s power infrastructure, a move that briefly eased tensions but did little to convince traders that a lasting resolution to the conflict is near.

Trump wrote on his Truth Social platform that the United States and Iran had engaged in “very good and productive” discussions about achieving what he described as a “complete and total resolution of hostilities in the Middle East.” However, Iranian officials quickly rejected the claim, denying that any direct negotiations had taken place.

The conflicting statements and renewed fighting across the region left global financial markets uncertain, as traders tried to interpret whether the five-day delay in planned strikes represented a genuine diplomatic opening or simply a temporary pause in escalating tensions.

Investors remain particularly concerned about disruptions to global energy flows through the Strait of Hormuz, a narrow waterway that normally handles about one-fifth of the world’s oil and liquefied natural gas shipments. The ongoing conflict has severely slowed traffic through the passage, raising fears of supply shortages and higher energy prices.

Rodrigo Catril, a currency strategist at National Australia Bank, said the latest developments have provided only limited relief for markets.

According to Catril, the overnight news offered a temporary break from extreme volatility but was unlikely to spark a strong shift toward risk-taking among investors. He added that Trump’s past policy shifts have made traders cautious about assuming the situation represents the beginning of serious negotiations.

Currency markets reflected this uncertainty, with several major currencies retreating slightly against the dollar.

The British pound weakened after posting strong gains in the previous session. Sterling fell 0.49% to $1.3388 after rising nearly 1% the day before. The euro also slipped, falling 0.3% to $1.1583 after advancing 0.4% in the previous trading session.

Commodity-linked currencies also lost ground. The Australian dollar dropped 0.6% to $0.6968, pulling back from a six-week high reached earlier. Meanwhile, the New Zealand dollar declined 0.5% to $0.5832.

The Japanese yen also remained under pressure, trading at around 158.73 per U.S. dollar. Recent economic data showed that Japan’s core consumer inflation slowed to 1.6% in February, falling below the 2% target of the Bank of Japan for the first time in nearly four years.

The softer inflation reading complicates the central bank’s efforts to justify further interest rate increases after years of ultra-loose monetary policy.

Meanwhile, energy markets continued to influence investor sentiment. Oil prices rose modestly after plunging more than 10% on Monday, with Brent Crude climbing back above $100 per barrel amid persistent supply concerns tied to the conflict.

Analysts said the dollar briefly weakened earlier when oil prices dropped sharply and investors repositioned their portfolios, but the move lacked strong conviction.

Chris Weston, head of research at Pepperstone, said the key question for markets is whether Trump’s announcement signals a genuine diplomatic extension or simply a delay that prolongs uncertainty.

He noted that while the U.S. currency initially experienced some selling pressure due to falling oil prices and shifting risk sentiment, the market remains vulnerable to sudden reversals because geopolitical risks remain elevated.

Meanwhile, the conflict itself showed little sign of easing. Israel’s military said Iran launched several waves of missiles targeting the country, while Iran’s powerful military organization, the Islamic Revolutionary Guard Corps, said it was carrying out fresh attacks on U.S. targets in the region.

Iranian officials also dismissed Trump’s remarks about negotiations, describing them as “psychological operations” intended to influence the conflict.

In broader currency markets, the U.S. Dollar Index rose 0.2% to 99.387 after falling 0.4% to near a two-week low on Monday.

The index has climbed roughly 1.8% so far this month and is on track for its strongest monthly performance since October. Analysts say the gains have been driven largely by demand for safe-haven assets as geopolitical tensions escalate.

At the same time, the conflict and rising energy prices have led traders to reassess expectations for interest rate cuts from the Federal Reserve this year.

Sim Moh Siong, a foreign exchange strategist at OCBC Bank, said the supportive environment for the dollar may persist as long as there are no clear signs that tensions in the Middle East are easing.

He added that higher oil prices are likely to feed into global inflation, potentially keeping interest rates higher for longer.

Bond markets reflected this shift in expectations. The yield on the two-year U.S. Treasury note, which tends to move closely with interest rate outlooks, rose by 7.7 basis points to 3.908% during Asian trading hours after falling by 6.3 basis points the previous day.

Investors are expected to remain focused on geopolitical developments and energy market disruptions in the coming days, as both factors continue to shape currency movements and broader financial market sentiment.