U.S. Dollar Strengthens as Middle East Conflict Escalates, Peace Talks Stall

The U.S. dollar climbed to multi-month highs Friday as investors sought safe-haven assets amid escalating Middle East tensions. Diplomatic efforts between Washington and Tehran show conflicting progress reports, while the Pentagon considers deploying 10,000 additional troops to the region.

HONG KONG – The U.S. dollar climbed toward multi-month highs Friday as global investors flocked to safe-haven assets while Middle East conflicts intensified and diplomatic solutions appeared increasingly elusive.

Financial markets experienced another volatile week after President Donald Trump extended his moratorium on strikes targeting Iran’s energy infrastructure through April. However, Washington and Tehran presented contradictory narratives about progress in diplomatic negotiations.

Adding to investor concerns, the Wall Street Journal reported Thursday that Pentagon officials are considering deploying as many as 10,000 additional ground forces to the Middle East region. This development further diminished market optimism about a swift resolution to the ongoing conflict.

The uncertainty drove investors toward the dollar as a secure asset while increasing expectations for a potential U.S. interest rate increase before year’s end, driven by inflationary pressures from sustained high energy costs.

Currency markets reflected the dollar’s strength, with the Japanese yen approaching 160 per dollar at 159.61, while the euro declined slightly by 0.03% to $1.1525. The British pound dropped 0.05% to $1.3325.

“It doesn’t look like the conflict will end anytime soon,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “The dollar is king while this conflict lasts.”

“If we’re right about this conflict being protracted, I think oil prices will just keep rising and it will push the dollar higher, at the expense of net energy importers like the Japanese yen and the euro,” she added.

Market pessimism pushed risk-sensitive currencies lower, with the Australian dollar falling to a two-month low of $0.68722. The New Zealand dollar similarly struggled near January lows, trading down 0.15% at $0.5754.

Measured against a basket of major currencies, the dollar rose marginally to 99.93, positioning for a 2.3% monthly gain that would represent its strongest performance since July of last year.

Market participants now assign a 46% probability to a 25-basis-point Federal Reserve rate increase by December, according to the CME Fedwatch tool. This marks a dramatic shift from expectations of more than 50 basis points of rate cuts that existed before the conflict began.

Both the Bank of England and European Central Bank are also anticipated to implement tighter monetary policies, with this hawkish shift in rate expectations pressuring bond markets and driving yields upward.

“A more prolonged disruption to energy supplies would deliver a larger hit to activity that would meet most definitions of a global recession and prompt a broader monetary tightening cycle,” said analysts at Capital Economics in a note.

U.S. Treasury yields remained stable Friday following sharp overnight increases, with two-year yields at 3.9776%. The benchmark 10-year yield decreased slightly to 4.4097%.