Dollar Steady as Central Banks Weigh Inflation and Geopolitical Risks

SINGAPORE, March 16 (Reuters) – The dollar held near a 10-month high on Monday as investors braced for a series of central bank meetings against the backdrop of heightened geopolitical tensions in the Middle East, particularly concerning the U.S.-Israel war on Iran.

Central Bank Meetings and Market Focus

At least eight central banks, including the U.S. Federal Reserve, the European Central Bank (ECB), the Bank of England (BOE) and the Bank of Japan (BOJ), are scheduled to meet this week to determine interest rate policies. These meetings mark the first policy reviews since the escalation of conflict in the Middle East. A key focus for policymakers will be assessing the impact of rising oil prices on both inflation and economic growth.

Geopolitical Risks and Economic Outlook

According to Carol Kong, a currency strategist at Commonwealth Bank of Australia, “The war… poses downside risk to economic growth and upside risks to inflation, so central bank responses will highly much depend on the recent context, specifically whether inflation has been above, on, or below target.”

Currency Movements

Prior to the central bank meetings, the dollar experienced a slight retracement from its recent gains. The euro saw a modest increase, trading up 0.14% at $1.1433 after reaching a 7-1/2-month low earlier in the session. Sterling likewise rose 0.17% to $1.3245, though remained close to its 3-1/2-month low from Friday, having declined 1.5% for the week. The dollar index eased slightly to 100.20 but remained near last week’s 10-month high.

Strait of Hormuz and Energy Security

U.S. President Donald Trump has called for international assistance in protecting the Strait of Hormuz, a critical shipping lane for oil and gas. He indicated that Washington is in discussions with several nations regarding the policing of this vital waterway, warning that NATO could face challenges if U.S. Allies do not contribute to securing the Strait.

Impact on Markets and Monetary Policy

Despite a slight decrease in oil prices due to the prospect of easing global energy disruptions, markets remain unsettled due to ongoing geopolitical tensions and uncertainty surrounding the duration of the conflict. Jorry Noeddekaer, head of global emerging markets and Asia at Polar Capital, believes that a significant shift in current central bank trajectories is unlikely, anticipating a relatively short-lived war.

Central Bank Specifics

• Reserve Bank of Australia (RBA): The Australian dollar increased by 0.55% to $0.7019, driven by expectations of a hawkish stance from the RBA. Markets are currently pricing in a 74% probability of a 25-basis-point rate hike, with some analysts, including CBA’s Kong, predicting two additional hikes in the coming months. Kong noted that Australian inflation was already high before the Middle East conflict and the energy price shock will exacerbate inflationary risks.
• Bank of Japan (BOJ): The Japanese yen remained weak, trading at 159.44 against the dollar. Japan’s heavy reliance on Middle Eastern energy supplies and the war’s impact on its trade terms and monetary policy flexibility are contributing to the yen’s weakness. Amova Asset Management’s chief global strategist, Naomi Fink, suggests that markets may be underestimating the potential for these pressures to create a difficult policy trade-off for the BOJ.

Other Currency Movements and U.S.-China Talks

The New Zealand dollar rose 0.47% to $0.5803, while the offshore yuan strengthened slightly to 6.9002 per dollar. Top U.S. And Chinese economic officials held “remarkably stable” talks in Paris, discussing potential areas of agreement in agriculture, critical minerals, and managed trade for consideration by President Trump and Chinese President Xi Jinping.