The U.S. Dollar Rises as a Safe Haven Amid Escalating Geopolitical Tensions
As March comes to a close, the U.S. Dollar Index is on track to post its biggest monthly gains since last July, buoyed by growing demand for it as a safe haven amid the escalating conflict in the Middle East.
These tensions have contributed to rising global oil prices, put pressure on most major currencies, and heightened concerns about a slowdown in global economic growth.
Why Is the US Dollar Rising?
The dollar’s strength has been driven by several key factors, most notably:
- The United States’ status as a major energy exporter.
- Investors’ shift toward cash during periods of uncertainty.
- Escalating geopolitical risks and their impact on the global economy.
Recent reports regarding the possibility of an end to U.S. military operations against Iran did not significantly affect currency movements, but they contributed to consolidating the dollar’s upward trend during the month.
Energy Risks Support the Dollar’s Continued Rise
The lack of a clear outlook on the reopening of the Strait of Hormuz remains a source of pressure on markets, as it heightens the risk of rising energy prices.
This increases the likelihood that economies outside the United States will be hit harder, thereby supporting the strength of the U.S. dollar.
The dollar index, which measures the currency’s performance against a basket of six major currencies, hit its highest level since last May, signaling continued upward momentum.
Major currency movements against the dollar
Euro vs. Dollar (EUR/USD)
The EUR/USD pair is attempting to close out March trading below the 1.15 level, trading near two-week lows after the single European currency lost more than 2% during the month.
Rising energy prices have increased inflationary pressures in Europe, prompting markets to reassess their expectations regarding the European Central Bank’s policy.
Current expectations point to the possibility of two interest rate hikes in 2026, rather than previous expectations that leaned toward cuts.
François Villeroy de Galhau also reaffirmed the bank’s commitment to curbing inflation, while noting the difficulty of determining the timing of any monetary policy change at this time.
British Pound vs. Dollar (GBP/USD)
The British pound is on track to end the month below $1.32, having fallen nearly 2% in March amid volatility stemming from geopolitical tensions.
Markets have repriced their expectations regarding the Bank of England’s policy, now anticipating at least two interest rate hikes in 2026, with a 50% probability of a hike in April.
Bank of England member Alan Taylor also called for caution, noting the need to keep borrowing costs stable until the effects of the current crisis become clear.
Dollar vs. Japanese Yen (USD/JPY)
Although the Japanese yen remains weak, threats of intervention by the Japanese government have limited selling pressure.
The pair is currently trading near the 160 yen level, its weakest since July 2024.
Satsuki Katayama confirmed the government’s readiness to intervene in the markets to counter sharp volatility, particularly as speculation in currency and energy markets intensifies.
Australian Dollar vs. US Dollar (AUD/USD)
The Australian dollar fell to $0.6850, following a six-session losing streak, hitting a two-month low with a monthly decline of about 3.7%.
The Reserve Bank of Australia’s minutes revealed a split in views on monetary policy, with a majority voting to raise interest rates to 4.10%, while others called for caution due to the risks of slowing growth.
Investors currently estimate a 58% probability that the Reserve Bank of Australia will raise interest rates in May, then June, and then August, meaning that interest rates on the Australian dollar could reach 4.85% by the end of 2026.
New Zealand Dollar (NZD/USD)
The New Zealand dollar fell to $0.5700, following losses of over 4.5% in March, hitting a four-month low.
The Reserve Bank of New Zealand is expected to hold its meeting soon, amid expectations that interest rates will be kept steady at 2.25%, with the possibility of a hike later in the year.
Outlook for Currency Markets
The US dollar is expected to remain strong in the coming period, supported by several key factors, most notably:
- Persistent geopolitical tensions
- Rising energy prices and their impact on the global economy
- Diverging monetary policies among central banks
- Increased demand for safe-haven assets
Given these factors, currency markets may remain subject to further volatility, with the dollar remaining strong relative to most major currencies.
As mentioned here in the weekly currency analysis video
