The yen and euro took a hit on Tuesday as the widening Middle East conflict focused attention on countries dependent on energy imports and how central banks might respond to inflation pressures.
The dollar benefited from safe-haven demand as the U.S. and Israeli air war against Iran spilled into neighbouring countries.
The euro steadied after sliding more than 1% as doubts swirled about when oil shipments from the region would be restored.
Crude prices climbed for a third day after Iran threatened to fire on ships trying to pass through the Strait of Hormuz.
Japanese Finance Minister Satsuki Katayama suggested that currency market intervention remained an option to defend the yen.
“Europe and Japan stand out within the major economies, in that they still have a great need to import energy,” Rodrigo Catril, a currency strategist at National Australia Bank, said on a podcast reported by Reuters. “History will tell you that currencies such as the yen and the euro would struggle to perform.”
The yen strengthened 0.06% to 157.29 per dollar, trimming its 0.8% drop on Monday. The euro traded up 0.03% at $1.1689 following its 1.1% slide in the previous session.
The dollar index, which measures the greenback against a basket of currencies, rose 0.04% to 98.55. Sterling weakened 0.07% to $1.3395.
Israel attacked Lebanon in response to strikes by Hezbollah, and Tehran kept up its missile and drone attacks on Gulf states. Qatar halted its production of liquefied natural gas on Monday, prompting precautionary shutdowns of oil and gas facilities across the Middle East.
Europe and Japan are more exposed to higher energy costs than the U.S., which is a net energy exporter.
Japan’s Katayama said financial officials are closely monitoring markets with an “extremely strong sense of urgency.” When asked about the possibility of currency intervention, she said Japan had reached a common understanding with the United States last year.
U.S. President Donald Trump said the war could continue for weeks and that it was unclear who was in charge in Iran after the death of Supreme Leader Ayatollah Ali Khamenei. Israeli Prime Minister Benjamin Netanyahu sought to ease concerns about the timeline, telling Fox News it would not be an “endless war.”
READ ALSO: Energy Infrastructure Emerges As War Target, Lifting Prices
Two drones hit the U.S. embassy in Riyadh, resulting in a limited fire and some damage, the kingdom’s defence ministry said in a post on X, citing an initial assessment.
Concerns that higher inflation will delay the Federal Reserve’s next cut in interest rates also boosted the dollar.
A rate cut is no longer fully priced in until September, compared to previous expectations of July, based on pricing in the Fed funds futures market. Traders continue to price in two 25-basis-point cuts by year-end.
Short-term Japanese government bond yields rose as inflation fears stoked expectations of an early rate hike by the central bank. Bank of Japan Governor Kazuo Ueda did not mention monetary policy in a speech on Tuesday, a day after saying market volatility would not prevent a rate increase.
The Australian dollar strengthened 0.25% to $0.7109, and advanced 0.9% to 111.81 yen. New Zealand’s kiwi edged up 0.05% to $0.5943.
In cryptocurrencies, bitcoin fell 1.53% to $68,368.17, and ether declined 1.64% to $2,009.87.
