The U.S. dollar on Monday surged to over a five-week high after U.S. and Israeli strikes on Iran raised demand for safe-haven assets.
At 15:06 ET (20:06 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.8% higher to 98.38, its highest level since late January.
Subscribe to InvestingPro for more foreign exchange analysis Dollar surges on Middle East conflict The United States and Israel launched military strikes on Iran over the weekend, killing Supreme Leader Ali Khamenei, and the attacks extended into Monday after Iran hit back, with blasts reported across Israel, the UAE, Qatar, Bahrain and Kuwait.
President Donald Trump said more strikes would continue “for as long as necessary,” underscoring the risk of a prolonged conflict and deepening market anxiety.
"The U.S. dollar shot higher overnight in a move which saw the Dollar Index hit a five-week high," David Morrison, senior market analyst at Trade Nation, said.
"The move was a strong indication that the U.S. dollar remains the go-to safe-haven currency for investors, and that those calling for further weakness due to de-dollarization, may be a bit early," Morrison said.
Oil prices shot up on the U.S.-Iran escalation. Higher energy prices tend to add to inflationary pressures, which in turn limits the Federal Reserve’s ability to cut interest rates.
"Upside momentum in the dollar may be constrained by stagflation concerns. Friday’s hotter-than-expected US Producer Price Index revived fears of sticky inflation even as growth shows signs of slowing," Morrison said.
"This creates a difficult policy dilemma for the Federal Reserve, which risks reigniting inflation if it cuts rates too soon or further slowing the economy if it holds policy tight," he added.
Euro, sterling retreat; Swiss franc in demand In Europe, EUR/USD traded 0.9% lower to 1.1707, with the single currency under pressure as the conflict in the Middle East is set to cause energy prices in the region to rise.
“Higher energy prices will see investors re-appraise their view of a renaissance in European industry. That said, the global economy is in a much better position than it was when energy prices spiked in March 2022 and there is now more fiscal support than there was back then,” analysts at ING said in a note.
“Unless there is some early de-escalation, EUR/USD can easily get pushed back to the 1.1575/1650 region, with outside risk to the 1.1575/1600 region. Investors have been right to question the safe haven status of the dollar this year, but given the nature of this shock (energy), it will be the dollar that benefits the most,” ING said.
GBP/USD dropped 0.5% to 1.3417, with sterling under pressure, while EUR/CHF rose 0.3% to 0.9113 as the safe-haven Swiss franc soared to its strongest in more than a decade versus the euro.
“The Swiss National Bank will not like it, but expect the focus now to switch to negative interest rates again in Switzerland. The CHF OIS market shows the 1m OIS priced at -12bp in one year’s time. That could well be priced to -25bp as buying pressure remains on the franc,” ING added.
Yen drops on higher crude prices In Asia, USD/JPY surged 0.7% to 157.20, as traders digested the effect of the jump in energy prices on oil imports, while the increased uncertainty is likely to encourage the Bank of Japan to adopt a more cautious stance, further reducing the probability of a near-term rate hike.
USD/CNY traded 0.4% higher to 6.8821, climbing above the 34-month lows hit last week, while AUD/USD dropped 0.3% to 0.7092, with the risk-sensitive Aussie dollar hit hard by the impact of higher crude prices.
