The dollar experienced an increase on Monday, driven by escalating retaliatory threats in the Middle East conflict, which dampened risk appetite and heightened demand for safe-haven assets. The Australian dollar, serving as a liquid indicator of global sentiment, declined as equities experienced a sell-off throughout Asia. Japan’s leading currency official indicated that the government is prepared to intervene in response to fluctuations in foreign exchange, as the yen experienced a slight decline. Over the weekend, prospects for a de-escalation of hostilities appeared to diminish, as U.S. President Donald Trump issued threats to target Iran’s electricity grid, while Tehran responded with promises to retaliate against the infrastructure of its neighboring countries. The leader of the International Energy Agency stated that the current crisis surpasses the combined impact of the two oil shocks experienced in the 1970s. “The market’s going with the idea that those countries and economies that enjoy a positive supply shock from energy are likely to perform better than those that are suffering from a negative supply shock,” Rodrigo Catril said. The euro and the yen are currently facing challenges in their performance. Should this conflict extend over time, it stands to reason that those currencies may experience greater challenges. The dollar index, which assesses the U.S. currency relative to a selection of counterparts, increased by 0.08% to 99.62.

The gauge on Friday marked its initial weekly decline since the onset of the conflict, driven by rising oil prices linked to inflation, which led central banks to adopt a more aggressive stance. The euro decreased by 0.16%, settling at $1.1552, while the yen fell by 0.14%, reaching 159.45 per dollar. Sterling experienced a decline of 0.06%, settling at $1.3331. The situation escalated on Monday, as Israel declared extensive strikes on Tehran, while Saudi Arabia reported the launch of two ballistic missiles aimed at Riyadh. Trump made his most recent threat to Iran on Saturday, shortly after indicating that the U.S. could be contemplating a de-escalation of the conflict. Iran has committed to executing retaliatory strikes on infrastructure in neighboring countries, asserting that the Strait of Hormuz shipping lane for oil will remain closed. The potential for reciprocal attacks on civilian infrastructure in the area poses a significant risk to the livelihoods of millions dependent on desalination facilities for their water supply.

As the yen approaches the significant 160 per dollar threshold, Japan’s leading currency diplomat Atsushi Mimura has expressed concern regarding the potential impact of speculative movements in oil markets on foreign exchange dynamics. During a speech in Sydney, IEA Executive Director Fatih Birol cautioned that the ongoing crisis represents a significant risk to the global economy, exceeding the energy shocks experienced in the Middle East during the 1970s. Major equity indexes across Asia experienced significant declines, with Japan’s Nikkei dropping as much as 5% at one point. Inflation concerns have impacted global debt markets, leading to a significant decline in Japanese government bonds, while the 10-year U.S. Treasury yield has surged to a near eight-month high of 4.415%. Prior to the onset of the U.S.-Israeli conflict with Iran in late February, market participants had anticipated two reductions by the Federal Reserve within this year.

However, even a single cut is now viewed as a remote possibility, while other significant central banks are adopting a more hawkish stance. “If markets price a U.S. tightening cycle, the USD will lift strongly against all currencies in our view,” Joseph Capurso wrote. “The AUD is likely to decline against the majority, if not all, major currencies in the event of global downgrades.” The European Central Bank maintained its interest rates on Thursday, while cautioning about inflation influenced by energy prices. The Bank of England maintained its current interest rates, whereas the Bank of Japan signaled the possibility of an increase as early as April. The Australian dollar declined by 0.43% against the US dollar, settling at $0.6993, while New Zealand’s kiwi decreased by 0.26% to $0.5819.