Dollar Climbs Toward 10-Month High as Middle East Tensions Boost Safe-Haven Demand

BY COMFORT OGBONNA

The U.S. dollar hovered near a 10-month high on Monday and remained on track for its strongest monthly performance since last July as uncertainty surrounding the Middle East conflict continued to drive investors toward safe-haven assets. Mixed signals from Iran and the United States have reduced hopes for a quick diplomatic resolution, keeping financial markets on edge and strengthening demand for the dollar.

U.S. President Donald Trump said Iran’s newly installed leadership had been “very reasonable,” suggesting that dialogue between the two sides could still be possible. However, tensions in the region remain high as additional U.S. troops continue to arrive in the Middle East while Tehran has warned it will not accept what it described as humiliation from foreign powers.

Currency markets reacted cautiously to the developments. The Japanese yen traded close to the psychologically important level of 160 per dollar, a level closely watched by traders because it previously triggered intervention by Japanese authorities to stabilize the currency. The euro, meanwhile, found modest support from growing expectations that the European Central Bank may raise interest rates later this year in response to rising inflation risks tied to higher energy prices.

The broader market environment has been unsettled throughout the month as the conflict involving Iran has effectively disrupted shipping through the Strait of Hormuz. The narrow waterway handles roughly one-fifth of global oil and gas supplies, making it one of the world’s most critical energy chokepoints. Concerns over supply disruptions have pushed Brent crude prices toward what could become a record monthly increase.

The rise in energy prices has had uneven effects across global economies. While higher oil prices have weighed on energy-importing economies such as Japan and several countries in the euro zone, the United States has been somewhat shielded from the impact because it is a major crude oil producer and exporter. This dynamic has helped strengthen the dollar as investors seek stability in the U.S. economy.

The U.S. dollar index, which measures the currency against a basket of major global currencies, was largely unchanged at 100.19. Earlier in March, the index reached 100.54, its highest level since May 2025. If the current trend continues, the dollar could record its biggest monthly gain since July of last year.

Analysts at Barclays said market sentiment toward the dollar has reached extremely bullish levels. Their internal indicators, which include growth expectations, interest-rate differentials, and risk-sensitivity metrics, suggest that traders have become increasingly confident in the currency’s strength amid ongoing geopolitical tensions.

Chris Weston, head of research at Pepperstone, said market participants are adjusting their strategies to cope with the uncertain global outlook. According to Weston, investors are increasingly inclined to sell rallies in risk-sensitive assets while maintaining hedges against volatility as geopolitical risks remain elevated.

Attention is also turning to upcoming economic data in the United States, particularly labor market figures scheduled for release later in the week. These numbers are expected to play an important role in shaping expectations about the future direction of monetary policy from the Federal Reserve.

Bob Savage, head of markets macro strategy at BNY, said the upcoming employment data will provide important insight into how the U.S. economy is performing amid a month marked by geopolitical instability and energy market volatility. February’s jobs report was weaker than expected, and economists are now eager to see whether employment conditions improved or deteriorated during March.

Savage noted that the labor market data could become a key factor in determining whether the Federal Reserve continues to hold interest rates steady or considers adjusting policy later in the year.

Meanwhile, in Europe, currency traders have been closely monitoring the outlook for the European Central Bank. The euro traded near $1.15 and remained on track for a decline of about 2.5% during March, marking its largest monthly drop since July.

However, expectations that the ECB could take a more aggressive stance on interest rates have helped prevent a sharper fall in the euro’s value. Thu Lan Nguyen, head of foreign exchange and commodity research at Commerzbank, said the euro would likely have weakened much more significantly if markets were not anticipating a more proactive response from European policymakers.

Nguyen explained that the recent rebound in oil prices and the strengthening of the dollar would typically put substantial pressure on the euro. Yet, investor belief that the ECB may raise rates to counter inflation linked to higher energy costs has helped limit the currency’s downside.

Before the Middle East conflict intensified, markets had been assigning more than a 50% probability to a potential interest-rate cut by the ECB this year. That outlook has since shifted dramatically, with traders now pricing in the possibility of rate increases by the end of the year instead.

In Asia, the Japanese yen remained near levels that previously triggered government intervention. The currency strengthened slightly by about 0.40% to trade at 159.65 per dollar after earlier weakening to 160.47 during the Asian trading session, its lowest point since July 2024.

The recovery came as Japanese officials increased warnings that authorities could step in to stabilize the currency if it weakens further. Policymakers also indicated that continued depreciation of the yen might prompt the Bank of Japan to consider raising interest rates sooner than expected.

Despite Monday’s modest rebound, the yen has declined more than 2% during March as rising oil prices continue to weigh heavily on Japan’s import-dependent economy.

Other currencies also faced pressure. The Australian dollar fell about 0.3% to $0.6851 and remained on track for a monthly decline of approximately 3.8%, which would mark its steepest drop since December 2024. The New Zealand dollar also weakened, slipping 0.4% to $0.57275 and heading toward a monthly fall of about 4.4%.

As geopolitical tensions persist and energy markets remain volatile, currency traders are expected to remain cautious. Investors across global financial markets are closely monitoring developments in the Middle East, central bank policy signals, and upcoming economic data, all of which could influence the direction of currencies and broader financial markets in the weeks ahead.