FOREX: Dollar holds firm as risk of protracted Middle East war saps sentiment

SINGAPORE – The U.S. dollar remained broadly steady on Monday, positioning itself for its strongest monthly gain since July as investors grew increasingly concerned about the long-term impact of the ongoing war in the Middle East. The yen fell past the critical 160 level, sparking concerns over potential market intervention.

Global markets have been rattled this month after the conflict effectively shut the Strait of Hormuz, a key chokepoint for roughly a fifth of the world’s oil and gas supply. The disruption pushed Brent crude toward its largest monthly increase and unsettled expectations for global interest rates.

The war, triggered by U.S. and Israeli strikes on Iran on February 28, has spread across the region. Fears of a ground offensive, combined with the entry of Yemen’s Iran-aligned Houthis on Saturday, further dampened investor sentiment.

Pakistan announced it is preparing to host “meaningful talks” in the coming days to end the conflict, while Tehran warned it is ready to respond if the United States launches a ground operation.

These developments kept the dollar on the front foot as investors sought safety. The euro traded at $1.1512, heading for a 2.5% decline in March—its weakest monthly performance since July. The British pound was at $1.32585, largely unchanged on the day but set for a 1.7% monthly drop. The dollar index, which tracks the U.S. currency against six major currencies, stood at 100.14 in early trading.

“What stands out is how quickly probabilities have shifted,” said Chris Weston, head of research at Pepperstone. “Only two weeks ago, U.S. boots on the ground in Iran were seen as a low-probability outcome. That has clearly changed, reinforcing the need for markets to remain open-minded. In this environment, traders remain defensive, selling rallies in risk assets and maintaining volatility hedges.”

Frail Yen Back in Focus

The Japanese yen strengthened slightly to 159.97 per dollar after earlier hitting 160.47, its weakest level since July 2024 when Tokyo last intervened in currency markets.

Japanese authorities remain ready to take “decisive” steps if speculative moves continue, top currency diplomat Atsushi Mimura said on Monday. The yen also gained support after Bank of Japan Governor Kazuo Ueda emphasized that the central bank is closely monitoring exchange-rate movements due to their significant impact on growth and inflation.

“We judge the recent weakening of the JPY as driven by fundamentals rather than speculation,” said strategists at Commonwealth Bank of Australia. “A direct market intervention would likely pull USD/JPY down by a few yen quickly.”

Elsewhere, the Australian dollar weakened 0.3% to $0.6851, on track for a 3.8% monthly decline—its steepest drop since December 2024. The New Zealand dollar fell 0.4% to $0.57275, down 4.4% in March.

-Reporting by Ankur Banerjee in Singapore; Editing by Shri Navaratnam/Reuters