The US dollar fell from recent multi-month peaks this week as surging energy costs, fueled by the ongoing US-Israeli conflict with Iran, reshaped global monetary policy expectations. The dollar index held near 99.359 but posted a 1.1% weekly drop, its sharpest since late January.
Read More: https://theboardroompk.com/oil-prices-drop-as-us-allies-move-to-secure-hormuz-and-boost-supply/
This reversal came despite earlier safe-haven gains, as other major central banks signaled readiness to tighten policy in response to inflation risks from disrupted oil and gas supplies.
Oil Surge Drives Policy Divergence Brent crude has climbed roughly 50% since late February when the war began, effectively shutting key Middle East export routes including the Strait of Hormuz.
Prices eased slightly on Friday after US President Donald Trump urged Israel to avoid further strikes on Iranian energy sites following attacks that damaged a major Qatari gas facility. The energy shock has forced importers to face higher costs, pushing central banks outside the US toward hawkish stances to combat inflation.
Central Banks Shift While Fed Holds Steady The European Central Bank kept rates at 2% but flagged energy-driven inflation risks, with markets now pricing in a potential hike by June. The Bank of England held steady yet hinted at readiness for tightening, while the Bank of Japan left the door open for an April move, supporting the yen.
Australia’s RBA recently hiked for the second time, with more anticipated. In contrast, the Fed maintained rates, with Chair Jerome Powell noting it was premature to gauge the war’s full impact. J.P. Morgan analysts highlighted the ECB’s unusual sensitivity compared to the Fed’s patience amid two-sided risks to its mandate.
This divergence weakened the dollar against peers: the euro rose 1.4% weekly to $1.1569, the yen gained 1.2% to around 157.88, sterling climbed over 1.5% to $1.3422, and the Australian dollar advanced 1.5% near 71 cents.
While prolonged dollar weakness is seen as unlikely, analysts like Commonwealth Bank’s Carol Kong warn that an extended conflict could eventually revive greenback strength via safe-haven flows and US energy exporter status.