The U.S. dollar strengthened to a one-week high against major currencies on Monday, driven by renewed tensions between the United States and Iran and diminishing hopes for a Middle East peace deal, which prompted investors to seek safe havens. The dollar later pared some of its gains.
The United States announced Sunday it had seized an Iranian cargo ship attempting to bypass its blockade, while Iran vowed retaliation, escalating fears of renewed hostilities. Tehran also stated it would not participate in a second round of negotiations that Washington had hoped to initiate before its two-week ceasefire with Iran concludes on Tuesday.
Charu Chanana, chief investment strategist at Saxo, noted that “The weekend escalation revives the geopolitical risk premium just as markets had started pricing a peace dividend,” adding that higher oil prices are “not just an energy story, it is a growth-and-rates story.”
The euro traded at $1.1757 after touching a one-week low of $1.1729, while sterling was down 0.11% at $1.3503. The risk-sensitive Australian dollar fell 0.27% to $0.7148. The dollar index, measuring the U.S. currency against six peers, stood at 98.30, near its weekly high, recovering some recent losses. The index has declined 1.5% in April due to rising risk appetite fueled by peace deal hopes, but surged 2.3% in March on safe-haven demand after the conflict began.
Analysts suggested that the restrained currency market movements, with the dollar giving back early gains, indicated lingering optimism for a resolution despite weekend setbacks. Chris Weston, head of research at Pepperstone, described the initial risk-off tone as “orderly rather than indicative of a major volatility shock,” noting that market participants understand the path to a formal agreement is often non-linear.
The conflict, now in its eighth week, has severely impacted energy supplies, causing oil prices to surge due to the de facto closure of the Strait of Hormuz, a crucial shipping lane for about a fifth of global oil. The U.S. has maintained a blockade of Iranian ports, while Iran has intermittently imposed its own blockade on marine traffic through the waterway. This led to a rebound in oil prices Monday, with Brent crude futures jumping over 5% to $95.53 a barrel and U.S. West Texas Intermediate rising over 6% to $89.08 a barrel.
Nick Twidale, chief market strategist at ATFX Global in Sydney, commented, “The key is still the Strait of Hormuz for many, and hopes that we could see the U.S. and Iran sit down at the negotiating table before the ceasefire ends now seem remote. For now, I think we will see further downside moves for risk in the coming sessions.”
The New Zealand dollar slightly eased to $0.5872. The yen weakened to 158.96 per dollar, nearing the 160 level that could trigger intervention to support the Japanese currency. Market attention will also be on the Bank of Japan meeting later this month. Governor Kazuo Ueda has avoided committing to an April rate hike due to the conflict’s impact on the outlook but hinted at tighter policy by June after last week’s IMF meetings.
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