Dollar gains ground as nerves deepen

Safe-haven demand pushed the US dollar towards its strongest monthly advance since July, as investors sought liquidity and relative shelter from a widening Middle East energy shock while also scaling back expectations for Federal Reserve easing this year. The dollar index was trading near 100.17 on March 27 and was up about 2.6 per cent for the month, a move that outpaced most major peers.

Currency markets have been driven by a mix of geopolitics, oil and interest-rate repricing. Escalating tension around Iran and shipping risks linked to the Strait of Hormuz have revived the dollar’s traditional haven role at the same time as higher energy prices have fed concern that inflation could stay above target for longer. That combination has lifted the greenback against sterling, the euro and several risk-sensitive currencies, even as equity markets and consumer confidence have come under pressure.

The scale of the March move is notable because the dollar had entered the year under pressure from assumptions that the Fed would eventually be able to ease policy as labour-market momentum cooled. Instead, the market has been forced to rethink that view. The Federal Open Market Committee left rates unchanged on March 18 and said inflation remained somewhat elevated, while officials have continued to warn that price pressures have not been fully defeated. Investors who only weeks ago were focused on cuts are now debating whether the next move could yet be a further increase if energy-led inflation broadens.

That repricing has become central to the dollar story. Reuters reported that the Fed is expected to deliver only one cut in 2026, while a separate Reuters market analysis said rates markets have flipped from expecting relief to pricing in the risk of fresh tightening across several advanced economies after oil and gas surged. Some economists have argued that markets may be overshooting, saying an energy spike can hurt growth as well as lift prices, but for now currency traders are giving more weight to inflation persistence and the appeal of dollar liquidity in periods of stress.

Sterling’s slide against the dollar underlines how broad the move has become. The pound was heading for its biggest monthly loss against the dollar since October, even though UK rate expectations have also shifted sharply higher. That suggests this is not simply a yield story. When geopolitical risk rises and energy supply fears intensify, the dollar often benefits from the size and depth of US capital markets, the currency’s reserve status and the tendency of investors to reduce exposure to assets seen as more cyclical or externally vulnerable.

Other currencies have shown the same pattern. The Canadian dollar extended its weekly losses despite the support that higher crude prices can normally offer to an energy exporter, while the yen weakened to levels that revived talk of possible intervention by Japanese authorities. Those moves point to a market in which the immediate instinct is to buy dollars first and sort through country-specific fundamentals later. The Australian dollar and the rupee have also been pressured by broader risk aversion.

Behind the currency moves sits a more uncomfortable macroeconomic picture. Reuters reported that US consumer sentiment fell to 53.3 in March from 56.6 in February, touching a three-month low as households absorbed higher fuel costs and rising inflation fears. Oil’s climb has raised concern that a commodity shock could reach consumers quickly through petrol and transport costs, complicating the Fed’s task and making markets more sensitive to every official comment on inflation and rates.

Still, the dollar’s rally is not without limits. Some analysts argue that if energy prices remain elevated for too long, the drag on growth could eventually outweigh the inflation impulse and bring rate-cut expectations back into play. Others note that haven rallies can fade quickly if diplomacy improves or shipping disruptions ease. Yet the market mood at the end of March has been shaped less by optimism than by scepticism over de-escalation efforts and by recognition that a prolonged energy shock would keep global central banks on edge.