FOREX: Dollar rises as escalating Middle East war spurs haven demand

TOKYO — The U.S. dollar strengthened on Monday as escalating threats in the Middle East weighed on investor sentiment and boosted demand for safe-haven assets.

The Australian dollar, often seen as a gauge of global risk appetite, slipped as equity markets across Asia fell. Japan's top currency diplomat signaled readiness to act against potential foreign-exchange volatility as the yen edged lower.

Tensions in the region intensified over the weekend. U.S. President Donald Trump threatened to target Iran’s electricity grid, while Tehran vowed retaliatory strikes on infrastructure in neighboring countries. Fatih Birol, executive director of the International Energy Agency (IEA), warned that the crisis could surpass the combined impact of the oil shocks of the 1970s.

Rodrigo Catril, currency strategist at National Australia Bank, said, “Countries benefiting from positive energy supply shocks are likely to perform better than those suffering negative shocks. Currencies like the euro and yen are struggling and could continue to underperform if the conflict persists.”

The dollar index, which tracks the U.S. currency against a basket of peers, rose 0.08% to 99.62. The euro fell 0.16% to $1.1552, the yen weakened 0.14% to 159.45 per dollar, and sterling slipped 0.06% to $1.3331.

The conflict broadened on Monday, with Israel launching strikes on Tehran and Saudi Arabia reporting two ballistic missiles fired toward Riyadh. The threat of retaliatory attacks on civilian infrastructure raises concerns for millions dependent on desalination plants for water.

Major Asian equity indexes dropped sharply, with Japan’s Nikkei tumbling up to 5% at one point. Concerns about inflation also affected global debt markets: Japanese government bonds fell, and the 10-year U.S. Treasury yield climbed to a near eight-month high of 4.415%.

Before the U.S.-Israeli war on Iran escalated in late February, markets had priced in two potential Federal Reserve rate cuts this year. Now, even one cut is considered unlikely, as other central banks shift toward more hawkish policies. Joseph Capurso, head of international economics at Commonwealth Bank of Australia, noted, “If markets price in a U.S. tightening cycle, the dollar will rise against all major currencies, and the Australian dollar could weaken further.”

Central banks have responded cautiously: the European Central Bank and the Bank of England kept rates steady, while the Bank of Japan signaled a possible hike as soon as April.

The Australian dollar fell 0.43% to $0.6993, and New Zealand’s kiwi dropped 0.26% to $0.5819. In cryptocurrencies, bitcoin rose 0.06% to $68,220.97, and ether gained 0.23% to $2,063.29.

-Reporting by Rocky Swift; Editing by Stephen Coates and Shri Navaratnam/Reuters