US Dollar Strengthens as Middle East Conflict Escalates, Yen Weakens

The US dollar maintained its strength Monday, heading for its best monthly performance since July as ongoing Middle East tensions drive investors toward safe-haven assets. The conflict has disrupted global oil flows through the Strait of Hormuz, while the Japanese yen fell to levels not seen since last summer's currency intervention.

The US dollar maintained its strength Monday as escalating Middle East tensions continued to drive investors toward safe-haven currencies, putting the greenback on track for its best monthly performance since July.

Global markets have experienced significant volatility this month following the effective closure of the Strait of Hormuz, a critical passage that handles approximately 20% of worldwide oil and natural gas shipments. This disruption has pushed Brent crude prices toward their largest monthly increase while creating uncertainty around global interest rate policies.

The current conflict began after US and Israeli military actions against Iran on February 28 and has since expanded throughout the region. Weekend developments, including potential ground operations and Yemen’s Iran-backed Houthis joining the conflict Saturday, have further dampened market confidence.

Despite Pakistan announcing preparations for “meaningful talks” to resolve the crisis in the coming days, Tehran has indicated readiness to retaliate should the United States initiate ground operations.

These developments have strengthened the dollar’s position as investors seek stability. The euro traded at $1.1512, tracking toward a 2.5% monthly decline – its worst performance since July. The British pound held at $1.32585, showing little daily movement but facing a 1.7% drop for March. The dollar index, measuring the US currency against six major counterparts, reached 100.14 during early trading.

“What stands out is how quickly probabilities have shifted. Only two weeks ago, U.S. boots on the ground in Iran was seen as a low-probability outcome,” explained Chris Weston, Pepperstone’s head of research.

“That has clearly changed, reinforcing the need for markets to remain open-minded. In this environment, traders remain defensive. The playbook is to sell rallies in risk and maintain volatility hedges,” Weston added.

The Japanese yen showed particular weakness, recovering slightly to 159.97 per dollar after touching 160.47 earlier in the session – its lowest point since July 2024 when Tokyo last stepped into currency markets.

Senior Japanese currency official Atsushi Mimura warned Monday that authorities are prepared to take “decisive” action if speculative currency movements persist.

Bank of Japan Governor Kazuo Ueda also provided some support for the yen, stating that the central bank is closely monitoring exchange rate fluctuations due to their significant effects on economic growth and inflation.

“We judge the recent weakening of the JPY as driven by fundamentals rather than speculation,” noted Commonwealth Bank of Australia strategists. “A direct market intervention will rapidly pull USD/JPY down by a few yen.”

Other currencies also faced pressure, with the Australian dollar declining 0.3% to $0.6851, heading for a 3.8% monthly drop – its steepest fall since December 2024. The New Zealand dollar weakened 0.4% to $0.57275, down 4.4% for March.