The U.S. dollar surged on Monday as a sharp rise in oil prices pushed investors toward cash amid growing concerns that an extended Middle East conflict could disrupt global energy supplies and slow economic growth.
During the Asian trading session, the dollar gave back part of its earlier gains after a report from the Financial Times indicated that G7 finance ministers would discuss a coordinated release of emergency oil reserves. The potential move, which would involve the International Energy Agency, caused crude prices to ease slightly after earlier climbing to nearly $120 per barrel.
Despite the pullback in oil prices, major global currencies remained under pressure. The euro fell 0.6% to $1.1548 after earlier touching a three-and-a-half-month low, while the British pound dropped 0.7% to $1.3333. Commodity-linked currencies such as the Australian dollar also weakened, and even the traditionally safe-haven Swiss franc slipped against the strengthening U.S. dollar.
According to Ray Attrill, head of FX strategy at National Australia Bank, the dollar continues to benefit from its traditional safe-haven status. The United States’ position as a net energy exporter also provides additional support, particularly when compared with Europe’s heavy reliance on imported energy.
The surge in oil prices triggered broad selling across global financial markets. Stocks, government bonds, and precious metals all declined as investors grew increasingly cautious about the economic impact of higher energy costs and rising inflation.
Market strategists warn that prolonged geopolitical tensions could amplify economic damage. Michael Every, senior global strategist at Rabobank, noted that the longer the conflict continues, the more severe the economic ripple effects could become, particularly as higher oil prices start to weigh on global markets.
Currency movements reflected the heightened uncertainty. The U.S. dollar rose 0.43% against the Swiss franc to 0.7795. The Australian and New Zealand dollars recovered slightly from earlier losses but still traded lower by 0.35% and 0.1%, respectively.
Analysts also warn that Asian economies may be particularly vulnerable to an energy price shock due to their dependence on Middle Eastern oil and gas imports. The dollar approached the 159 yen level, rising 0.4% to 158.47 against the Japanese currency, and gained 0.26% against the South Korean won to 1,485.50.
Deepali Bhargava, regional head of research for Asia-Pacific at ING, said the key question for global markets is how long oil prices remain elevated. If the conflict continues and regional currencies weaken further, inflation pressures across Asia could intensify.
Political developments in Iran have added to market uncertainty. Tehran announced a new Supreme Leader, signaling that hardline leadership remains firmly in control as the conflict enters its second week.
The fighting has already disrupted roughly one-fifth of global crude oil and natural gas supplies. Iran has reportedly targeted vessels passing through the Strait of Hormuz, a critical shipping route between Iran and Oman, while attacks on regional energy infrastructure have raised fears of further supply interruptions.
Energy officials in the Gulf have warned that the situation could worsen. Qatar’s energy minister recently told the Financial Times that Gulf producers might be forced to halt exports within weeks if tensions escalate, potentially pushing oil prices as high as $150 per barrel.
Higher energy prices tend to act as a tax on global economies while also increasing inflation risks. This has raised concerns that central banks could delay interest rate cuts as they assess the impact of rising oil costs.
Weak U.S. employment data released on Friday initially slowed the dollar’s rally and increased expectations for Federal Reserve rate cuts. However, those expectations have since moderated, with markets now pricing in less than 40 basis points of easing by the end of the year.
Kyle Rodda, senior financial market analyst at Capital.com, said that a surge in inflation driven by higher oil prices could create divisions within the Federal Reserve. Policymakers may ultimately choose to delay policy changes until they better understand the economic consequences of an oil shock.
