Dollar cashes in on safe-haven demand, set for best month since July  

By Amanda Cooper

LONDON, March 27 (Reuters) – The dollar headed for its strongest monthly gain in almost a year on Friday, driven by investors seeking safety as the Middle East war intensifies and hopes of de-escalation fade.

Markets were on edge after another volatile week as U.S. President Donald Trump again extended a deadline for striking Iran’s energy facilities, even as Washington and Tehran offered starkly conflicting accounts of diplomatic progress.

The Pentagon is also considering sending up to 10,000 more ground troops to the region, the Wall Street Journal reported, further dimming investor hopes of a near-term end to the war.

Safe-haven flows underpinned the dollar, which has also been lifted by rising expectations for a U.S. rate increase this year. The dollar index was trading around 100, up 2.4% so far in March, on course for its best monthly showing since July 2025, when it rose 3.4%.

TESTING THE BOJ

The yen weakened towards 160 per dollar, a level traders see as a possible trigger for official intervention. It was last flat at 159.86, after touching 159.98 earlier.

“The market is going to test the Japanese authorities’ resolve. So they’ve been saying repeatedly now over the last couple of weeks that they’re prepared to take bold action. Obviously, we’re getting to kind of levels now which we’ve seen as potential trigger points for intervention,” said MUFG currency strategist Lee Hardman. 

The yen, down 1.3% this month, also came under pressure from another jump in Japanese bond yields after the Bank of Japan published new estimates for its neutral rate that signalled policymakers are prepared to raise rates to counter inflation. Japan’s heavy reliance on imported energy leaves it more exposed to higher prices than many other major economies.

The euro eased 0.1% to $1.152, while sterling fell for a fourth straight session, down 0.2% to $1.331.

“It doesn’t look like the conflict will end anytime soon,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “The dollar is king while this conflict lasts.” 

“If we’re right about this conflict being protracted, I think oil prices will just keep rising and it will push the dollar higher, at the expense of net energy importers like the Japanese yen and the euro,” she added.

The risk-sensitive Australian dollar fell to a two-month low before recovering to trade flat at $0.688. The currency has lost around 2% since the start of the war, making it the second-worst performer among major currencies after the Indian rupee, which is down nearly 3%. 

Investors are now pricing in roughly a 70% chance of one quarter-point Federal Reserve hike this year, according to the CME FedWatch tool, a sharp reversal from expectations of more than 50 bps of easing before the war.  

The Bank of England and the European Central Bank are also seen tightening policy, part of a broader shift in rate expectations that has hammered bonds and pushed yields to multi-year highs this month.

U.S. Treasury yields inched higher on Friday after jumping overnight. The two-year yield stood at 3.9899%, while the benchmark 10-year yield was up about 1 bp to 4.4278%. [US/]

(Additional reporting by Jiaxing Li in Hong Kong. Editing by Shri Navaratnam and Mark Potter)