The currency gained as investors rushed toward safe-haven assets amid widespread market volatility. However, the dollar trimmed some of its gains during Asian trading hours after a report by the Financial Times indicated that finance ministers from the Group of Seven (G7) were set to discuss a coordinated release of emergency oil reserves.
The potential move—expected to be organised through the International Energy Agency—briefly eased oil prices, which had earlier surged close to $120 per barrel.
Euro, pound weaken
Despite the partial retreat in oil prices, major currencies continued to lose ground against the dollar. The euro fell about 0.6 per cent to $1.1548 after earlier hitting a three-and-a-half-month low, while the British pound dropped 0.7 per cent to around $1.3333.
Commodity-linked currencies such as the Australian and New Zealand dollars also weakened, while even traditional safe-haven currencies like the Swiss franc slipped slightly.
According to Ray Attrill, head of foreign exchange strategy at National Australia Bank, the dollar was benefiting from its safe-haven appeal and the United States’ position as a net energy exporter.
“The U.S. dollar is finding no shortage of support from traditional haven considerations and the United States’ net energy exporter status, in sharp contrast to most of Europe,” he said.
Broad market sell-off
Financial markets experienced a broad sell-off as investors moved to reduce risk exposure. Stocks, bonds and precious metals all declined as traders reacted to fears that higher oil prices could intensify global inflation and weaken economic growth.
Michael Every, senior global strategist at Rabobank, warned that the economic fallout could escalate if the crisis continues.
“The longer this goes on, the more exponential the damage becomes in a domino effect,” he said, adding that the market’s reaction to rising oil prices reflects growing fears that the situation could worsen.
Asian currencies under pressure
Asian economies—many of which rely heavily on Middle Eastern energy imports—are seen as particularly vulnerable to the shock.
The dollar rose 0.4 per cent against the Japanese yen to about 158.47 and climbed 0.26 per cent against the South Korean won to around 1,485.50, after earlier rising as much as one per cent.
Deepali Bhargava, regional head of research for Asia-Pacific at ING, said the key issue is how long oil prices remain elevated.
“A prolonged conflict, coupled with continued currency weakness, would feed more directly into inflation pressures across the region,” she said.
Middle East tensions driving oil surge
The market turmoil comes amid escalating conflict involving Iran, which has reportedly disrupted a significant portion of global oil and gas flows.
Shipping through the strategically important Strait of Hormuz has been targeted, raising fears of further disruptions to global energy supply.
In addition, Mojtaba Khamenei was named to succeed his father, Ali Khamenei, as Iran’s supreme leader—signalling that hardline leadership remains in place in Tehran as the conflict continues.
Energy officials have warned that the situation could worsen if Gulf producers halt exports. The energy minister of Qatar told the Financial Times that oil prices could climb as high as $150 per barrel if regional exports are disrupted.
Implications for interest rates
Rising oil prices also complicate the outlook for monetary policy. Higher energy costs can fuel inflation, potentially forcing central banks to delay interest-rate cuts.
Recent weak labour data from the United States had earlier raised expectations that the Federal Reserve might begin lowering interest rates this year. However, the surge in energy prices has reduced those expectations, with traders now pricing in less than 40 basis points of rate cuts by year-end.
Kyle Rodda, senior financial market analyst at Capital.com, said policymakers may take a cautious approach.
“A spike in inflation from higher oil prices will divide the Fed,” he said. “Ultimately, the dynamic will likely delay any move from the Fed because policymakers will want time to assess the impact of an oil shock on the economy.”