Global currency markets opened the week with the U.S. dollar largely steady near levels not seen in about ten months, as investors prepared for a string of central bank rate decisions and monitored developments in the U.S.-Israel war on Iran. At least eight central banks are scheduled to hold policy meetings this week, including the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan - the first set of policy sessions since the Middle East conflict began.
Market attention is concentrated on how central bankers will assess the inflationary and growth effects of rising oil prices tied to the conflict. Carol Kong, a currency strategist at Commonwealth Bank of Australia, summarized the dilemma for policymakers: "The war ... poses downside risk to economic growth and upside risks to inflation, so central bank responses will very much depend on the recent context, specifically whether inflation has been above, on, or below target."
In trading, the dollar pared some of last week’s gains, while the euro recovered modestly after dipping to a seven-and-a-half-month low earlier in the session. The single currency was trading 0.14% higher at $1.1433. Sterling also improved slightly, up 0.17% at $1.3245, though it remains close to the three-and-a-half-month low it hit on Friday following a 1.5% decline over the prior week. The dollar index edged down to 100.20 but stayed near last week’s 10-month peak.
Geopolitical developments continued to influence energy markets and trade routes. U.S. President Donald Trump said he is pressing other countries to help secure the Strait of Hormuz, and that Washington is in discussions with several nations about policing the key shipping lane for oil and gas. In a separate interview with the Financial Times, he warned that NATO could face a "very bad" future if U.S. allies do not assist in efforts to keep the strait open.
Those remarks helped push oil prices slightly lower on the prospect of coordinated action to ease potential supply disruptions. Nevertheless, markets remained unsettled amid high geopolitical tension and uncertainty over the duration of the war, now in its third week.
Sentiment among investors on the likely trajectory of central bank policy shifts is mixed but cautious. Jorry Noeddekaer, head of global emerging markets and Asia at Polar Capital, described his base case as the war being relatively short-lived, and noted: "As things stand now, the likelihood we will really see a change in current trajectory for central banks and their monetary policies around the world is, in our view, very, very limited."
Rates expectations are diverging across regions. The Australian dollar was firmer, rising 0.55% to $0.7019 on growing expectations that the Reserve Bank of Australia will tighten policy at its meeting on Tuesday. Markets were pricing in a high probability that the RBA would deliver a 25-basis-point increase. Kong said: "We are now pencilling two more hikes, one this week and another in May. In Australia, inflation was already too high even before the Middle East conflict started, so with the new energy price shock, that will further increase risks to inflation."
By contrast, the yen remained under pressure and held near the 160-per-dollar level, last quoted at 159.44. Japan’s heavy dependence on Middle Eastern energy supplies and a weaker currency have added to concerns over the Bank of Japan’s policy outlook. Naomi Fink, chief global strategist at Amova Asset Management, warned of broader trade and policy stresses: "For Japan, the key risk is not simply higher oil prices, but a deterioration in terms of trade driven by the costs of imported energy and logistics, compounded by yen weakness and constrained monetary policy flexibility. Markets - especially foreign exchange - may be underestimating the probability of these pressures forcing a more difficult policy trade-off for the Bank of Japan."
Elsewhere in currency markets, the New Zealand dollar rose 0.47% to $0.5803, while the offshore Chinese yuan strengthened slightly to 6.9002 per dollar.
On the diplomatic front, senior U.S. and Chinese economic officials held talks in Paris that sources described as "remarkably stable." The discussions on Sunday touched on potential areas of agreement in agriculture, critical minerals and managed trade for the bilateral leaders to consider in Beijing, according to the sources.
With a busy calendar of central bank meetings and continuing geopolitical uncertainty, market participants are positioned for potential volatility across currencies, energy markets and growth-sensitive assets. How central banks reconcile the inflationary pressures from higher oil prices with growth risks stemming from the conflict will be central to pricing and positioning this week.