Dollar rebounds as Mideast tensions flare again

The US dollar strengthened to a one-week high against major currencies on Monday, only to give up some of its gains as renewed tensions between the United States and Iran prompted investors to seek safe-haven assets.

The move followed developments over the weekend.

The United States said on Sunday that it had seized an Iranian cargo ship that attempted to breach its blockade.

Iran responded by warning it would retaliate.

These developments raised concerns about a possible escalation in hostilities.

Tehran also stated it would not participate in a second round of negotiations that Washington had hoped to initiate before a two-week ceasefire expires on Tuesday.

The developments dampened hopes for a near-term peace agreement.

Geopolitical risks return to market focus

Market participants reacted quickly to the renewed tensions.

As reported in a Reuters report, Charu Chanana, chief investment strategist at Saxo, said, "The weekend escalation revives the geopolitical risk premium just as markets had started pricing a peace dividend."

She added that rising oil prices are not limited to energy concerns, stating, "is not just an energy story, it is a growth-and-rates story."

Despite the spike in geopolitical risks, currency market movements remained relatively contained.

The dollar gave back part of its early gains during mid-morning trading in Asia.

Currency markets show limited volatility

The euro traded at $1.1757 after touching a one-week low of $1.1729 earlier in the session.

Sterling slipped 0.11% to $1.3503.

Meanwhile, the Australian dollar, often seen as a risk-sensitive currency, declined 0.17% to $0.7155.

The dollar index stood at 98.30.

It hovered near a one-week high and recovered some recent losses.

The index is still down 1.5% in April.

This follows a 2.3% surge in March driven by safe-haven demand after the conflict began.

Strait of Hormuz remains key concern

The ongoing conflict, now in its eighth week, has significantly disrupted energy markets.

Oil prices surged due to the effective closure of the Strait of Hormuz, a critical route that typically handles around one-fifth of global oil shipments.

The United States has continued its blockade of Iranian ports.

Iran has alternated between lifting and reimposing restrictions on maritime traffic through the key waterway.

These disruptions pushed oil prices higher on Monday.

Brent crude rose more than 5% to $95.2 per barrel.

US West Texas Intermediate climbed over 6% to $88.99 per barrel.

Yen weakness and policy outlook in focus

The New Zealand dollar edged lower to $0.5876.

The Japanese yen weakened to 159.06 per dollar.

This level is close to the key 160 threshold that traders closely monitor for possible intervention.

Attention is also turning to the Bank of Japan’s upcoming policy meeting.

Governor Kazuo Ueda has avoided committing to an April rate hike.

The ongoing conflict has complicated the economic outlook.

However, he signalled a slightly hawkish stance after last week’s IMF meetings.

This has raised expectations that tighter monetary policy could be considered by June.