The U.S. dollar strengthened sharply on Monday as surging oil prices and fears of a prolonged Middle East conflict pushed investors toward safe-haven assets, underscoring growing anxiety about the potential impact of energy disruptions on global inflation and economic growth.
Currency markets moved quickly as traders reassessed geopolitical risk. The euro fell about 0.5% against the dollar to $1.1559 after touching a three-and-a-half-month low earlier in the session, while the British pound declined roughly 0.6% to $1.3338. Commodity-linked currencies also weakened, with the Australian dollar slipping about 0.25% and the Swiss franc losing around 0.4% against the U.S. currency.
Analysts say the dollar’s rally reflects its traditional role as a global refuge during periods of uncertainty, particularly when geopolitical shocks threaten energy supplies.
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“The dollar is clearly benefitting as being relatively insulated from a lot of these Middle East risks and also picking up its usual haven trade,” said Nick Rees, head of macro research at Monex Europe.
The move into the dollar coincided with broad weakness across financial markets. Stocks, government bonds, and precious metals all declined as investors shifted toward cash positions, concerned that soaring oil prices could reignite inflation and weigh on economic activity worldwide.
Michael Every, senior global strategist at Rabobank, warned that prolonged disruption could trigger cascading economic effects.
“The longer this goes on, the more exponential the damage becomes in a domino effect,” he said. “If we are still in the same position this time next week, things could be quite terrifying.”
Oil markets have been at the center of the turmoil. Brent crude initially surged more than 25% during trading before paring gains to about $104.60 per barrel, still up roughly 13% on the day. Prices briefly retreated in Asian trading after the Financial Times reported that Group of Seven (G7) finance ministers may discuss a coordinated release of emergency oil reserves through the International Energy Agency.
Such a move would echo past crisis responses aimed at stabilizing supply shocks, though analysts say its effectiveness would depend on the scale and duration of the disruption.
The conflict has already begun to disrupt global energy flows. Roughly one-fifth of the world’s crude oil and natural gas supply has been affected after Iran targeted vessels in the Strait of Hormuz — a strategic chokepoint through which a significant share of global energy exports pass — and struck regional energy infrastructure.
Energy officials warn that the situation could worsen. Qatar’s energy minister told the Financial Times that Gulf producers may shut down exports within weeks if the conflict escalates, a scenario that could push oil prices as high as $150 per barrel.
Currency traders are closely monitoring which economies would bear the heaviest impact. Asia is widely seen as particularly vulnerable due to its heavy reliance on Middle Eastern oil and liquefied natural gas imports, while the euro zone and the United Kingdom also remain exposed to energy price volatility.
Deepali Bhargava, regional head of research for Asia-Pacific at ING, said the duration of elevated oil prices will determine the scale of the economic fallout.
“The real question is how high and how long prices stay elevated, because that’s what will ultimately determine the economic fallout,” she said. “A prolonged conflict, coupled with continued currency weakness, would feed more directly into inflation pressures across the region.”
The dollar also strengthened against the Japanese yen, rising about 0.37% to around 158.41. The move kept the currency close to the psychologically important 159 level, highlighting sustained upward pressure as investors reposition portfolios.
Geopolitical developments added another layer of uncertainty. Iran on Monday named Mojtaba Khamenei as successor to his father as supreme leader, signaling that hard-line leadership remains firmly in place in Tehran as the conflict enters its second week.
The crisis is also reshaping expectations for U.S. monetary policy. Weak U.S. employment data released on Friday had briefly boosted speculation that the Federal Reserve might cut interest rates sooner than expected. However, the sharp rise in oil prices has complicated that outlook.
Traders are now pricing roughly 35 basis points of Federal Reserve easing by the end of the year, down from more than 55 basis points in late February.
Kyle Rodda, senior financial market analyst at Capital.com, said policymakers may delay any near-term decisions while they assess the economic consequences of the energy shock.
“Ultimately, the dynamic will likely delay any move from the Fed because policymakers will want time to review the impacts of any oil shock and how it influences the data,” he said.
For global markets, the key risk remains the potential for energy supply disruptions to deepen. If oil prices remain elevated or climb further, economists warn the shock could slow global growth while reigniting inflation — a combination that would complicate policy responses from central banks worldwide.