The US dollar rallied sharply on Wednesday as investors scrambled for safety amid an escalating war involving Iran, triggering a selloff in global equities and renewed fears of energy-driven inflation.
The dollar index rose for a third straight session to its strongest level in three months, while the euro and commodity-linked currencies came under pressure as oil and gas prices extended their surge.
The risk-off mood reverberated across asset classes. On Wall Street, major indices ended lower overnight as energy costs stoked concerns that inflation could re-accelerate just as central banks were preparing to pivot towards easier policy. In Europe, the benchmark Stoxx Europe 600 slipped to a one-month low, reflecting broad-based weakness across sectors.
Energy shock lifts dollar, hits euro
Currency markets bore the brunt of the turmoil. The euro fell 0.3 per cent to $1.1581, extending losses into a third day and touching its weakest level since late November. The single currency has come under renewed strain as investors factor in the euro zone’s heavy dependence on imported energy, much of it priced in dollars.
“The impact of the Iran war on EUR/USD boils down to one thing: energy,” George Saravelos, global head of FX research at Deutsche Bank, said in a note. “There is a negative supply shock under way which represents a direct tax on Europeans that has to be paid to foreign producers in dollars.”
Brent crude climbed above $82 per barrel in early Asian trade, taking gains since last Friday to roughly 14 per cent. European natural gas prices have soared nearly 70 per cent over the same period, amplifying concerns that the region could face another inflation spike.
The US dollar index, which tracks the greenback against a basket of major currencies, rose 0.2 per cent to 99.284 — its highest level since late November. The British pound slipped 0.3 per cent, while the Australian and New Zealand dollars also weakened despite upbeat domestic data in Australia.
Asian markets exposed to energy risks
Asian equities opened under pressure, with investors wary of the region’s exposure to higher imported fuel costs. Energy-importing economies such as Japan and India remain particularly vulnerable to sustained oil prices above $80 a barrel, which could widen trade deficits and strain currencies.
In offshore trade, the Chinese yuan held broadly steady after mixed February purchasing managers’ index data, though sentiment remained fragile.
Analysts warned that the conflict’s impact could be longer lasting if shipping routes in the Gulf remain disrupted or if production outages spread further across the Middle East.
Inflation fears complicate policy outlook
The spike in energy prices has also clouded the outlook for the European Central Bank, which was widely expected to lean towards policy easing later this year. Rising fuel costs could complicate that path, especially after data showed euro zone inflation ran hotter than anticipated in February, even before the latest escalation.
ING analysts said the prospect of renewed rate pressures posed risks to carry trades and could trigger wider spreads in euro zone government bonds.
In the United States, the inflationary implications of higher oil have taken centre stage. President Donald Trump has pledged US military escort and insurance support for oil tankers transiting volatile waters, signalling Washington’s concern that prolonged disruptions could feed directly into domestic fuel prices and consumer inflation.
Cryptos edge higher
In digital assets, bitcoin rose 0.8 per cent to around $68,585, while ether gained a similar margin. The modest uptick suggested some investors were diversifying into alternative assets, though the broader flight to safety clearly favoured the dollar and US Treasuries.
For now, markets remain hostage to headlines from the Middle East. With oil and gas prices surging and central banks facing a renewed inflation dilemma, the greenback’s rally underscores a familiar pattern in times of geopolitical stress: when uncertainty spikes, the dollar remains the ultimate refuge.
Iran crisis deepens uncertainty
Investor sentiment was jolted after sources cited by Iran International claimed that Iran’s Assembly of Experts had reportedly chosen Mojtaba Khamenei, son of Supreme Leader Ali Khamenei, as the next Supreme Leader following his father’s reported death in joint US-Israeli strikes. Iranian state media has not confirmed the development.
The alleged decision, said to have been taken under pressure from the Islamic Revolutionary Guard Corps (IRGC), signals a potentially greater role for the Guards in Iran’s political structure — a factor that markets fear could harden Tehran’s regional posture.
The geopolitical situation continued to deteriorate overnight. Iran reportedly launched fresh strikes on Israeli and US-linked targets in the Gulf. Qatar said it intercepted two Iranian SU-24 fighter jets, along with seven ballistic missiles and five drones. Saudi Arabia also reported intercepting cruise missiles and drones near Riyadh.
Meanwhile, oil prices surged nearly 4.7 per cent to their highest levels since January 2025 amid fears of supply disruptions. European gas prices spiked more than 20 per cent after Qatar temporarily halted LNG production, adding to energy market volatility.
The United States has authorised non-emergency staff to leave Saudi Arabia and Oman, while the US Senate is set to vote on a War Powers resolution seeking to limit further military action against Iran.
With inputs from agencies.
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