By Jiaxing Li HONG KONG, March 27 (Reuters) - The dollar pushed higher toward multi-month peaks on Friday as investors sought safety in the shadow of an intensifying Middle East war and mounting
Dollar rises on safe-haven demand, yen slides as Middle East risks mount
Market Movements Amid Middle East Tensions
By Laura Matthews
NEW YORK, March 27 (Reuters) - The dollar rose on Friday and was on course for its strongest monthly gain in almost a year, buoyed by safe-haven demand as the Middle East war intensifies and hopes fade for de-escalation.
The yen was particularly under pressure, falling in afternoon trading to its weakest since July 2024 and raising the possibility of currency market intervention by the Japanese authorities.
Geopolitical Developments Impacting Markets
Iran is expected to respond on Friday to a U.S. peace proposal to end the war, with U.S. President Donald Trump and senior White House officials told by interlocutors to expect a counter-proposal.
U.S. Secretary of State Marco Rubio said that the war was expected to last weeks, rather than months, and that U.S. objectives could be met without ground troops.
U.S. consumer sentiment slipped to a three-month low in March as war-driven oil price rises weighed on the economic outlook.
Safe-Haven Flows and Dollar Performance
Safe-haven flows underpinned the dollar, which has also been lifted by rising expectations for a U.S. rate increase this year. The dollar index rose 0.3% to 100.17, up 2.57% so far in March and on course for its best monthly showing since July 2025, when it rose 3.4%.
"Weekend trading is also, to a certain degree, taking hold in terms of what you might or might not want to be long or short over the weekend," said Marvin Loh, senior global market strategist at State Street in Boston. "The dollar has been pretty correlated with risk these days in the correct way."
Ongoing Diplomacy and Market Volatility
While senior Iranian officials said diplomacy continued, the Islamic Revolutionary Guard Corps reiterated a ban on all shipping through the Strait of Hormuz that was linked to allies of the U.S. and Israel.
Markets stayed on edge at the end of another volatile week, as Trump again extended a deadline for striking Iran's energy facilities even as Washington and Tehran offered starkly conflicting accounts of diplomatic progress.
The Pentagon is considering sending up to 10,000 more ground troops to the region, the Wall Street Journal reported, further dimming investor hopes of a near-term end to the war.
Testing the Bank of Japan
Yen Weakness and Japanese Policy Response
Against the dollar, the yen fell 0.34% to 160.35 yen, crossing the 160 yen level for the first time since July 2024, when Japanese officials last intervened to prop up the currency.
The yen, down 2.74% so far this month, also came under pressure from another jump in Japanese bond yields after the Bank of Japan published new estimates for its neutral rate, which signalled that policymakers are prepared to raise rates to counter inflation. Japan's heavy reliance on imported energy leaves it more exposed to higher prices than many other major economies.
"The dollar's strength is continuing with some of the volatility we see, so that is going to be a little bit of the catalyst for that stronger dollar/yen," said Loh.
Global Currency and Market Reactions
The euro slipped 0.17% to $1.1509, while sterling fell for a fourth straight session, down 0.48% at $1.3268.
The risk-sensitive Australian dollar was 0.2% lower at $0.687, after falling to a two-month low. The currency has lost around 3% since the start of the war, making it the second-worst performer among major currencies after the Indian rupee, which is down 5.37%.
Central Bank Perspectives and Rate Expectations
Richmond Fed President Thomas Barkin said uncertainty surrounding the war and the adoption of artificial intelligence supports the Federal Reserve keeping rates steady.
Philadelphia Federal Reserve President Anna Paulson also highlighted the risks to growth and inflation related to the war.
"Until a month ago, the Fed futures were predicting, as was the Fed itself, one more rate decrease this year," said Joseph Trevisani, senior analyst at FX Street in New York. "That has completely reversed. The direction that the speculation goes is now on rate increases."
The Bank of England and the European Central Bank are also expected to tighten policy, part of a broader shift in rate expectations that has hammered bonds and pushed yields to multi-year highs this month.
Bond Yields and Market Outlook
U.S. Treasury yields inched higher on Friday after jumping overnight. The two-year yield stood at 3.914%, while the benchmark 10-year yield rose 2.2 basis points to 4.438%. [US/]
(Reporting by Laura Matthews in New York; Additional reporting by Amanda Cooper in London and Jiaxing Li in Hong Kong. Editing by Shri Navaratnam, Mark Potter, Arun Koyyur, Nick Zieminski, Colin Barr and Edmund Klamann)
