The US dollar strengthened further on Monday, climbing to a three-month high against the euro as oil prices surged above $100 a barrel, equities declined and investors sought safer assets amid fears that a prolonged Middle East war could disrupt global energy supplies.
The dollar rose 0.8% to $1.1525 per euro, its strongest level since November, and gained nearly 0.4% to 158.48 yen in early Asian trading.
Sterling, along with the Australian and New Zealand dollars, fell more than 0.6% against the greenback. Meanwhile, Brent and US crude futures jumped to above $108 per barrel, a level that could begin to weigh on global economic growth.
“Oil remains the transmission channel into inflation expectations, interest rates and currency markets, with the dollar’s resurgence echoing the 2022 energy crisis,” said Bob Savage, head of markets macro strategy at BNY.
“The week ahead will test whether markets continue to view the conflict as a contained shock or begin to price in a more persistent disruption to energy supplies.”
The dollar — which posted its sharpest weekly gain in 15 months after the conflict escalated last week — has emerged as the most effective safe-haven asset for investors, even as gold has weakened amid broad profit-taking in assets that previously posted strong gains.
“The dollar benefits from its dual status as both a safe-haven currency and the currency of a major energy exporter,” said Joe Capurso, head of foreign exchange, international and geoeconomics at Commonwealth Bank in Sydney.
“We expect the Iran-US conflict to escalate before it de-escalates. Iran has an incentive to retaliate to strengthen its negotiating position, while the US and Israel are motivated to weaken Iran’s offensive capabilities.”
The Australian dollar fell 0.7% to $0.6983 and the New Zealand dollar slipped 0.6% to $0.5860. Sterling dropped nearly 0.8% to $1.3324, while the dollar also gained about 0.5% against the traditionally defensive Swiss franc.
Iran on Monday named Mojtaba Khamenei as the successor to his father as supreme leader, signalling that hardline leadership remains firmly in control in Tehran a week after fighting erupted with the United States and Israel.
The conflict has already disrupted roughly a fifth of global crude and natural gas supply, as Tehran targets shipping in the critical Strait of Hormuz between Iran and Oman and strikes energy infrastructure across the region.
Qatar’s energy minister told the Financial Times on Friday that Gulf energy producers could halt exports within weeks, a move that could push oil prices to $150 per barrel.
Elevated energy prices can act as a drag on economic growth and fuel inflation, raising concerns among investors that central banks may delay or limit interest rate cuts.
Weak US jobs data released on Friday briefly paused the dollar’s advance and increased expectations of interest rate cuts. However, those expectations eased on Monday as US stock futures declined, with S&P 500 futures falling 1.6%.