Dollar Climbs as Safe-Haven Demand Intensifies
The U.S. dollar strengthened toward multi-month highs on Friday as investors moved into safe-haven assets amid escalating tensions in the Middle East and growing skepticism over any near-term de-escalation.
Geopolitical Uncertainty Keeps Markets on Edge
Markets remained volatile following a turbulent week, with U.S. President Donald Trump extending a pause on strikes targeting Iran’s energy infrastructure into April. Meanwhile, conflicting signals from Washington and Tehran regarding diplomatic progress have further increased uncertainty.
Adding to the tension, the Pentagon is reportedly considering deploying up to 10,000 additional ground troops to the region, according to a report by The Wall Street Journal. This development has dampened hopes for a swift resolution to the conflict.
Stronger Dollar Driven by Rate Expectations
As geopolitical risks rise, investors have increased their demand for the dollar, reinforcing its status as a global safe-haven currency. At the same time, expectations for a potential interest rate hike by the Federal Reserve later this year have strengthened, largely due to inflationary pressures linked to persistently high energy prices.
Currency Markets React to Rising Tensions
The Japanese yen weakened toward the 160 per dollar level, trading at 159.61, while the euro edged down slightly to $1.1525. The British pound also slipped modestly to $1.3325.
According to Carol Kong of Commonwealth Bank of Australia, the ongoing conflict is likely to support further dollar strength, particularly if oil prices continue to rise. Prolonged instability could weigh heavily on currencies of energy-importing regions such as Japan and the eurozone.
Commodity Currencies Under Pressure
Risk-sensitive currencies were also affected, with the Australian dollar falling to a two-month low of $0.68722. The New Zealand dollar similarly declined, hovering near its weakest level since January at $0.5754.
Dollar Index and Monthly Performance
Against a basket of major currencies, the dollar index rose slightly to 99.93 and is on track for a 2.3% gain this month. This would mark its strongest monthly performance since July of last year.
Shifting Interest Rate Outlook
Investor expectations for monetary policy have shifted significantly. Markets are now pricing in a 46% probability of a 25-basis-point rate hike by December, based on data from the CME FedWatch tool. This represents a sharp reversal from earlier expectations of rate cuts before the conflict escalated.
Meanwhile, both the Bank of England and the European Central Bank are also expected to maintain a tighter monetary stance. This shift has pressured bond markets, pushing yields higher.
Rising Recession Risks
Analysts at Capital Economics warned that prolonged disruptions to energy supplies could significantly slow global economic activity, potentially leading to a recession and triggering broader monetary tightening.
Treasury Yields Hold Steady
U.S. Treasury yields stabilized on Friday after a sharp rise in the previous session. The two-year yield stood at 3.98%, while the benchmark 10-year yield eased slightly to 4.41%.
