Key Points:
- The US dollar rose as escalating threats in the Middle East boosted demand for safe assets.
- President Trump threatened to attack Iran’s power grid, prompting vows of retaliation against neighboring countries.
- Investors no longer expect the Federal Reserve to cut interest rates twice this year.
- Global central banks are turning hawkish amid fears of severe energy inflation.
The US dollar started the week with a strong rebound. After closing out its first weekly decline since the war in Iran began, the greenback gained fresh momentum on Monday morning. Escalating military threats in the Middle East immediately damped investor appetite for risk, sending traders rushing back toward the safety of the American currency.
Over the weekend, hopes for a quick, peaceful end to the hostilities completely vanished. On Saturday evening, US President Donald Trump publicly threatened to strike Iran’s electricity grid. This aggressive statement arrived less than 24 hours after the President hinted he might consider winding down the conflict. In response, Tehran vowed to launch retaliatory strikes against the energy and water systems of its neighboring countries and promised to keep the vital Strait of Hormuz closed to all shipping traffic.
This terrifying prospect of tit-for-tat strikes on civilian infrastructure poses a massive threat to the region. Millions of people living in the Gulf rely entirely on complex desalination plants for their daily drinking water. The reality of the war hit home early Sunday morning when air raid sirens sounded across Israel, warning citizens of incoming missiles fired from Iran.
Currency experts are watching the economic fallout closely. Rodrigo Catril, a currency strategist at National Australia Bank, explained the current market logic on a recent podcast. He noted that countries enjoying a positive energy supply shock are performing much better than those suffering from negative supply shocks. Because Europe and Japan rely heavily on imported energy, the euro and the yen are currently struggling. Catril added that if this military conflict proves long-lasting, those specific currencies will likely suffer even more.
The raw market numbers reflect this global anxiety. The dollar index, which measures the greenback against a basket of major currencies, rose 0.03% to reach 99.53. Meanwhile, the euro slid 0.06% to $1.1563, and the British pound weakened by 0.06% to $1.3331. The Japanese yen managed a tiny 0.06% gain, trading at 159.11 per dollar.
The war has destroyed previous economic predictions. Before the US-Israeli attacks on Iran started in late February, investors confidently priced in 2 interest rate cuts by the Federal Reserve for this year. Now, those same investors believe even 1 single rate cut is a highly distant prospect. Instead of easing, major central banks around the world are turning noticeably more hawkish to fight off inflation.
The Federal Reserve left rates on hold as expected last week. During his press conference, Fed Chair Jerome Powell admitted it was still too soon to know the full scope and duration of the war’s economic impact. Across the ocean, the European Central Bank also kept rates on hold on Thursday but issued a stark warning about inflation driven by skyrocketing energy prices. The Bank of England followed suit by holding its rates steady, while the Bank of Japan actually left the door open for a potential rate hike as soon as April.
The ripple effects of this tension are hitting all types of investments. Equity futures currently point to a steep plunge in Japan’s Nikkei stock index. Meanwhile, the yield on 10-year US Treasury bonds rose to a near 8-month high of 4.4055%. The risk-sensitive Australian dollar weakened by 0.17% to $0.7011, and New Zealand’s kiwi edged 0.03% lower to $0.5832. Even the cryptocurrency market felt the pressure, with bitcoin falling 0.41% to $67,900.41 and ether declining 0.26% to $2,053.17.
