Quick overview

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The U.S. dollar is on track to post its biggest monthly gain since July as investors grow increasingly concerned about the consequences of a prolonged war in the Middle East. The shift in sentiment has pushed the yen below the crucial 160 level, reviving fears of possible intervention.

Markets have been shaken this month after the conflict effectively shut down the Strait of Hormuz, a key chokepoint for roughly a fifth of global oil and gas flows. The disruption has propelled Brent crude toward its largest monthly gain on record and significantly altered expectations for interest rates.

The war, triggered by U.S. and Israeli strikes on Iran on February 28, has since spread across the Middle East. Fears of a potential ground offensive — along with the entry over the weekend of Iran-aligned Houthi forces from Yemen — have further darkened market sentiment.

Pakistan said it is preparing to host “meaningful talks” aimed at ending the conflict in the coming days. However, Tehran warned it is ready to respond if the United States launches a ground operation.

Investors were largely unmoved by comments from U.S. President Donald Trump, who said Washington has held both “direct and indirect” talks with Iran and that the country’s new leaders have been “very reasonable.”

Dollar, yen, yuan and euro: where they stand

The U.S. dollar edged slightly lower during the Asian session but largely held on to its recent gains.

The euro rose 0.1% to $1.15145, though it remains on track for a 2.5% decline in March, which would mark its worst monthly performance since July.

Sterling traded at $1.3271, little changed on the day but heading for a 1.7% drop this month. Meanwhile, the U.S. Dollar Index — which measures the currency against six major peers — fell 0.2% to 100.1.

“What stands out is how quickly the probabilities shifted. Just two weeks ago, the presence of U.S. troops on the ground in Iran was considered a low-probability scenario,” said Chris Weston.

“That clearly changed, reinforcing the need for markets to stay open-minded. The strategy is to sell into risk rallies while maintaining hedges against volatility,” he added.

For now, the market’s main focus remains firmly on oil prices. Brent crude futures are trading at $115.53 per barrel, up about 59% in March — the largest monthly surge on record.

“The path for the dollar from here simply depends on oil. Wherever oil goes, the dollar will follow,” said Prashant Newnaha.

The surge in oil prices has revived inflation concerns, prompting U.S. interest-rate futures to begin pricing in the risk of a rate hike by the Federal Reserve this year — a sharp reversal from earlier in the year, when traders were betting on up to two rate cuts in 2026.

At the same time, investors are increasingly weighing the long-term economic impact of a prolonged war.

“Central banks are in the most uncomfortable position: prices argue for tightening, while growth signals argue for caution,” said Marc Chandler.

“That’s the calling card of stagflation — and it arrived before most were prepared for it.”