Dollar holds firm as risk of protracted Middle East war saps sentiment

The U.S. dollar held broadly steady on Monday, poised for its strongest monthly gain since July as investors fret about the ramification of a long war in the Middle East, denting the yen past the crucial 160 level and spurring intervention jitters.

Markets have been rattled this month after the conflict effectively shut the Strait of Hormuz, a chokepoint for about a fifth of global oil and gas flows, driving Brent crude toward ‌its biggest monthly ⁠rise and ⁠unsettling global rate expectations.

The war, sparked by U.S. and Israeli strikes on Iran on February 28, has since spread across the Middle East, with fears of a ground offensive and the entry of Yemen's Iran-aligned Houthis on Saturday further souring sentiment.

Pakistan said it was preparing to host "meaningful talks" to end the conflict in coming days even though Tehran said it is ready to respond if the United States launches a ground operation.

That left the dollar on the front foot as investors sought safety this month. ⁠The euro ‌fetched $1.1512, on course for 2.5% drop in March, its weakest monthly decline since July.

Sterling was at $1.32585, little changed on the day but set for a drop of 1.7% this ⁠month. The dollar index, which measures the U.S. currency against six other units, was at 100.14 in early trading.

"What stands out is how quickly probabilities have shifted. Only two weeks ago, U.S. boots on the ground in Iran was seen as a low-probability outcome," said Chris Weston, head of research at Pepperstone.

"That has clearly changed, reinforcing the need for markets to remain open-minded. In this environment, traders remain defensive. The playbook is to sell rallies in risk and maintain volatility hedges"

FRAIL YEN BACK IN SPOTLIGHT

The Japanese yen firmed a bit to 159.97 ‌per dollar after hitting 160.47 earlier in the session, its weakest level since July 2024 when Tokyo last intervened in the currency markets.

Japanese authorities stand ready to take "decisive" steps if speculative moves continue in the ⁠foreign exchange market, top currency diplomat Atsushi Mimura said on Monday.

The yen also drew support after Bank of Japan Governor Kazuo Ueda said the central bank was watching exchange-rate moves closely, underscoring their powerful impact on growth and inflation.

"We judge the recent weakening of the JPY as driven by fundamentals rather than speculation," said strategists at Commonwealth Bank of Australia. "A direct market intervention will rapidly pull USD/JPY down by a few yen."

In other currencies, the Australian dollar was 0.3% weaker at $0.6851, on course for a monthly drop of 3.8%, its steepest decline since December 2024. The New Zealand dollar weakened 0.4% to $0.57275, down 4.4% in March.