The US dollar just finished its strongest month in almost a year, boosted by tensions in the Middle East and steady economic data. As conflicts heat up and central banks gear up for key meetings this week, investors have turned to the greenback for safety.
Flight to Safety Amid Middle East Conflict
The dollar’s rally traces back to late February, when the US and Israel launched strikes on Iran, sparking unrest in the Middle East. The conflict sent oil prices soaring more than 40% this month, hitting levels unseen since 2022. This surge has battered other major currencies, especially the euro, which remains vulnerable due to Europe's reliance on oil imports.
"Everything is being driven by oil at present," said Eugene Epstein, head of trading and structured products at Moneycorp in New Jersey. "I don't think the movement is necessarily correct." His view captures the uneasy mood among traders, who are increasingly cautious about the dollar’s sharp moves.
The dollar index, a gauge against a basket of currencies, climbed to a 10-month peak of 100.54 last Friday. Though it pulled back slightly on Monday to just below 100, it remains close to its recent highs. Even with market jitters from the Middle East war, the dollar has stayed strong, proving its role as a safe haven.
Central Banks in the Spotlight
This week has been heavy with central bank activity, with the Federal Reserve, European Central Bank, Bank of England, and Bank of Japan all holding meetings or signaling policy intentions.
Investors are cautious, watching closely to see how central banks will handle inflation pressures worsened by the energy shock.
Market expectations have shifted markedly. At the start of the year, traders priced in multiple rate cuts by the Fed during 2026. Now, after the oil price surge and geopolitical tensions, those expectations have been pared back to just one cut, if any. The CME’s FedWatch tool shows the market is nearly certain the Fed will hold rates steady at its meeting this Wednesday.
"The market has priced in a lot of hawkishness purely based on expectations of higher inflation because of this oil shock," Epstein added. "I think that's very misplaced and will eventually work its way out in the weeks ahead and maybe months." The Fed’s cautious tone shows it’s trying to balance controlling inflation with supporting growth amid global volatility.
Currency Movements and Intervention Risks
The euro and sterling have both struggled this month.
The euro touched a 7½-month low before bouncing back slightly, while sterling hovered just above a 3½-month trough. Both currencies have been under pressure due to their economic links to energy imports and the broader uncertainty gripping Europe.
The Japanese yen has been one of the worst hit, falling over 2% against the dollar since the conflict began. It recently hit 160 yen per dollar — a level last seen in July 2024, which triggered official intervention at the time. Japan’s fiscal challenges and heavy energy dependence have intensified the currency’s vulnerability.
Tokyo has warned it may intervene again if the yen weakens too much, reflecting concerns over the currency’s impact on inflation and financial stability. The Bank of Japan’s attempts to normalise monetary policy by raising interest rates clash with government plans for expansive fiscal stimulus, adding to the yen’s shaky footing.
Oil Prices and Global Economic Risks
Oil remains a key driver.
Brent crude and West Texas Intermediate prices have both surged above $100 a barrel at times this month before retreating slightly. The Strait of Hormuz, a crucial oil chokepoint, has become a focus for US diplomatic and military efforts, with President Donald Trump seeking allied support to secure passage through the narrow waterway.
With the conflict ongoing, oil prices will probably stay volatile, keeping inflation risks front and center for central banks. Higher energy costs feed into consumer prices and pose a challenge for policymakers already balancing inflation with growth concerns.
Bank of America analysts have noted that Wednesday’s Federal Reserve meeting is unlikely to bring major surprises, given the geopolitical uncertainties. Chair Jerome Powell’s comments are expected to underline the risks from the Middle East and the potential for inflation to stay elevated longer than hoped.
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Geopolitical tensions are simmering and central banks are on edge, so the dollar’s safe haven status seems likely to stick around. How long this strength lasts hinges on the Middle East conflict and how fast inflation pressures ease—both big unknowns for traders and policymakers.
This article was created with AI assistance.
