The US dollar surged on Monday, reaching its highest level in five weeks, after US and Israeli strikes on Iran increased demand for safe-haven assets.
At 12:45 (Saudi Arabia time), the dollar index, which tracks the performance of the US currency against a basket of six other currencies, rose by 0.6% to 98.187, trading at its highest level since late January.
The dollar is rising sharply as the conflict in the Middle East escalates.
The United States and Israel launched military strikes on Iran over the weekend, killing Supreme Leader Ali Khamenei. The attacks extended into Monday after Iran retaliated, with explosions reported across Israel, the United Arab Emirates, Qatar, Bahrain and Kuwait.
US President Donald Trump said more strikes would continue as long as necessary, underscoring the risk of a protracted conflict and deepening market anxiety.
The weekend's developments appear decidedly positive for the dollar, and we identify three channels at play. The first is US energy independence and the energy dependence of Europe and Asia, analysts at ING said in a note.
The second channel is what all this means for Federal Reserve policy. Notably, Fed interest rate futures fell 3-4 basis points in Asia based on the view that the Fed may not be able to cut interest rates twice this year, ING added.
The third and related channel is that rising energy prices and questions about the Federal Reserve’s ability to cut interest rates will halt and possibly reverse portfolio flows into emerging markets.
The euro and pound are falling; the Swiss franc is in demand.
In Europe, the EUR/USD pair fell 0.6% to 1.1741, with the single currency under pressure as the conflict in the Middle East is expected to cause energy prices in the region to rise.
Higher energy prices will prompt investors to reassess their views on the revival of European industry. However, the global economy is in a much better position than it was when energy prices spiked in March 2022, and there is now greater financial support than at that time, ING said.
Unless there is an early lull, the EUR/USD pair could easily be pushed to the 1.1575/1.1650 area, with an outward risk to the 1.1575/1.1600 region. Investors were right to question the dollar's safe-haven status this year, but given the nature of this (energy) shock, the dollar is the one that will benefit the most.
The GBP/USD pair fell 0.8% to 1.3375, with sterling under pressure, while the EUR/CHF pair fell 0.3% to 0.9055 as the safe-haven Swiss franc rose to its strongest level in more than a decade against the euro.
The Swiss National Bank will not be pleased with this, but expects the focus to now shift back to negative interest rates in Switzerland. The CHF OIS market shows that 1m OIS is priced at -12 basis points a year from now. This could well be priced in at -25 basis points as buying pressure on the franc persists, ING added.
The yen is falling as crude oil prices rise.
In Asia, the USD/JPY pair rose 0.7% to 157.07, as traders digested the impact of the surge in energy prices on oil imports, while increased uncertainty is likely to encourage the Bank of Japan to take a more cautious stance, further reducing the likelihood of a near-term interest rate hike.
The USD/CNY pair rose 0.4% to 6.8842, rebounding from its 34-month low hit last week, while the AUD/USD pair fell 0.7% to 0.7069, with the risk-sensitive Australian dollar taking a hit from the impact of rising crude oil prices.
