The U.S. dollar strengthened to its highest level in a week against major currencies on Monday before trimming gains, as renewed tensions between the United States and Iran and fading hopes of a Middle East peace deal pushed investors toward safe-haven assets.
The United States announced on Sunday that it had seized an Iranian cargo vessel attempting to breach its blockade, while Iran warned of retaliation, raising concerns about a possible escalation in hostilities.
Tehran also stated it would not take part in a second round of negotiations that Washington had hoped to begin before the current two-week ceasefire expires on Tuesday.
“The weekend escalation brings back a geopolitical risk premium just as markets were starting to factor in a peace dividend,” said Charu Chanana, chief investment strategist at Saxo Bank. She added that rising oil prices are not just an energy issue but also impact economic growth and interest rate expectations.
The euro was last trading at $1.1757 after earlier falling to a one-week low of $1.1729, while the British pound slipped 0.11% to $1.3503. The risk-sensitive Australian dollar declined 0.27% to $0.7148.
The dollar index, which tracks the U.S. currency against six major peers, stood at 98.30, hovering near its highest level in a week and recovering some recent losses.
Despite the rebound, the index remains down 1.5% in April, reflecting earlier optimism tied to potential peace progress. It had climbed 2.3% in March due to safe-haven demand following the outbreak of conflict.
Analysts noted that currency market movements remained relatively controlled, with the dollar giving up some early gains, indicating lingering optimism that a resolution may still be possible despite recent setbacks.
Chris Weston, head of research at Pepperstone, said the current risk-off sentiment at the start of the week appears orderly rather than signaling a major volatility shock.
“Market participants recognize that reaching a formal agreement was never likely to be straightforward and remains vulnerable to sudden developments, so shifts in sentiment are not entirely unexpected,” Weston said.
Markets Focus on Strait of Hormuz
Now in its eighth week, the conflict has created one of the most significant disruptions to global energy supplies, driving oil prices sharply higher due to the effective closure of the Strait of Hormuz, which typically handles around 20% of the world’s oil shipments.
The United States has continued its blockade of Iranian ports, while Iran has alternated between lifting and reinstating its own restrictions on maritime traffic through the key shipping route.
This situation triggered a surge in oil prices on Monday. Brent crude futures rose more than 5% to $95.53 per barrel, while U.S. West Texas Intermediate climbed over 6% to $89.08 per barrel.
“The focus remains on the Strait of Hormuz, and expectations of the U.S. and Iran returning to negotiations before the ceasefire ends now appear unlikely,” said Nick Twidale, chief market strategist at ATFX Global in Sydney.
“For the time being, risk assets may continue to face downward pressure in the coming sessions,” he added.
The New Zealand dollar edged down slightly to $0.5872.
Meanwhile, the Japanese yen weakened to 158.96 per dollar, staying below the key 160 threshold that traders believe could prompt intervention to support the currency.
Attention is also turning to the upcoming Bank of Japan policy meeting later this month. Governor Kazuo Ueda has avoided committing to an April rate hike amid uncertainty caused by the conflict, although he signaled a slightly hawkish stance following last week’s IMF meetings, hinting at the possibility of tighter monetary policy by June.