As investors worry about the consequences of a protracted conflict in the Middle East, the U.S. dollar remained largely stable on Monday, positioned for its biggest monthly gain since July. This caused the yen to drop below the critical 160 level and sparked concerns about intervention. Due to the conflict’s effective closure of the Strait of Hormuz, a chokepoint for roughly a fifth of the world’s oil and gas flows, markets have been shaken this month, pushing Brent crude near its highest monthly increase and raising concerns about rate expectations. The U.S. and Israeli assaults on Iran on February 28 set off the conflict, which has since expanded throughout the Middle East. Fears of a ground invasion and the arrival of the Iran-aligned Houthis in Yemen on Saturday have further soured the situation. Despite Tehran’s declaration that it is prepared to retaliate in the event that the United States initiates a ground campaign, Pakistan said it was getting ready to host “meaningful talks” to end the crisis in the coming days.

U.S. President Donald Trump’s remarks that Washington has had “direct and indirect” talks with Iran and that its new leaders have been “very reasonable” were mostly ignored by investors. As investors looked for protection this month, it put the dollar in a strong position. With a price of $1.1512, the euro was headed for its lowest monthly decrease since July, a 2.5% decline in March. With minimal movement on the day, sterling was trading at $1.32585, although it was expected to decline by 1.7% this month. In early trading, the dollar index, which compares the value of the US dollar to six other units, was at 100.14.The speed at which probability have changed is noteworthy. According to Chris Weston, “just two weeks ago, American boots on the ground in Iran were seen as a low-probability outcome. “That has obviously changed, which emphasizes how important it is for markets to maintain their openness. The strategy is to keep volatility hedges and sell riskier rallies. As Brent crude futures stand at $114.6 a barrel, up roughly 58% in March—its strongest monthly surge on record—the market’s attention is currently firmly focused on oil prices.

The USD’s future depends only on how oil is perceived. According to Prashan Newnaha, “the USD goes where oil goes.” In contrast to earlier this year, when traders were placing bets on as many as two rate cuts in 2026, rising oil prices have rekindled fears about inflation, leading U.S. rate futures to start pricing in the likelihood of a Federal Reserve rate hike later this year. Investors are also increasingly considering the long-term financial consequences of a protracted conflict. According to Marc Chandler, “central banks find themselves in the most uncomfortable of positions: facing prices that argue for tightening while growth signals argue for caution. “The hallmark of stagflation, it came before most people were prepared to accept it. After reaching 160.47 earlier in the session—its lowest level since Tokyo’s previous currency market intervention in July 2024—the Japanese yen strengthened to 159.77 per dollar.

The turnaround occurred as Japan prepared to threaten yen intervention and hinted that additional currency declines might support a short-term increase in interest rates. Concerns about rising oil prices have caused the yen to fall more than 2% in March. Bank of Japan Governor Kazuo Ueda stated that the central bank will closely monitor yen movements as they impact the economy and prices, while Japan’s top currency ambassador Atsushi Mimura stated that authorities may need to take “decisive” actions if speculative fluctuations continue in the currency market.
The Australian dollar was down 0.3% at $0.6851 in other currencies, headed for a monthly decrease of 3.8%, the highest since December 2024. After falling 4.4% in March, the New Zealand dollar dropped 0.4% to $0.57275.