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Sterling falls for a third day as investors favour safe-haven dollars

Reuters: The pound fell against the dollar for a third day on Thursday, as investors favoured the U.S. currency above most other assets in the face of a rising ​oil price and no end in sight for the war in the Middle East. Sterling, which has lost nearly 1% in value against the dollar this month, was last down 0.1% on the day at $1.336. The pound was a touch stronger against the euro , which traded down 0.1% at 86.44 pence, bringing its losses ​for the month to 1.4%. This is the euro's worst monthly performance against the pound ​since November 2024, when it fell 1.6%.

For markets, the main focus is the ⁠oil price, which has risen by around 45% since the war started in late February. As ​a result, investors expect central banks, including the Bank of England, to have to shift to raising ​rates to combat the risk of a damaging spike in inflation. The BoE, which prior to the conflict had been expected to cut rates twice this year, is now expected to raise rates at least twice before the end of ​the year, as is the European Central Bank, according to money markets. Traders are attaching a ​roughly 40% chance of the Federal Reserve raising rates once this year.

This mismatch would ordinarily boost the pound, but given Britain's ⁠dependence on energy imports, as well as its more fragile government finances and higher borrowing rates, sterling has come under fire over the last month. BoE Deputy Governor Sarah Breeden said on Thursday she saw less risk of second-round inflation effects from rising energy prices caused by the Iran war than from Russia's ​full-scale invasion of Ukraine ​in 2022, due to ⁠a softer labour market.

"Where we are now is very different to 2022 when we had the last energy shock," she told an event hosted by ​the Resolution Foundation think tank.

A number of strategists have said they feel ​the BoE has ⁠far less room to raise rates this year and, as such, some of those bets on successive rate hikes could be unwound, which would leave sterling vulnerable to a pullback. "We still see some upside risks ⁠for euro/sterling ​due to the larger room for dovish repricing in a ​de-escalation scenario for the sterling curve. A move past 87.0 in the coming weeks remains our baseline," ING strategist Francesco Pesole ​said.

Reuters: The dollar pushed higher toward multi-month peaks on Friday ​as investors sought safety in the shadow of an intensifying Middle East war and mounting doubts ‌over any path to de-escalation. Markets were on edge following another rollercoaster week as U.S. President Donald Trump again extended a pause on strikes against Iran's energy facilities into April even as Washington and Tehran offered starkly conflicting accounts of diplomatic progress. The Pentagon is also looking ​at sending up to 10,000 additional ground troops to the Middle East, the Wall Street Journal reported on ​Thursday, doing little to bolster investor hopes of an imminent end to the war.

That ⁠kept the dollar bid as investors flocked to the safe-haven currency and ramped up expectations of a U.S. ​rate hike by the year-end, owing to the inflationary pulse from higher-for-longer energy prices. The yen, on the other hand, ​was left on the cusp of 160 per dollar and stood at 159.61, while the euro was off a touch 0.03% at $1.1525. Sterling eased 0.05% to $1.3325. "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 darkening market mood sent the risk-sensitive Australian dollar down to a two-month trough of $0.68722, while the New Zealand dollar similarly languished near its lowest level since January and traded down 0.15% at $0.5754. Against a basket of currencies, the dollar was marginally higher at 99.93, though was on track for a 2.3% ​rise this month, which would ​mark its biggest gain ⁠since July last year.

Investors are now pricing in a 46% chance of a 25-basis-point rate hike from the Federal Reserve by December, according to CME Fedwatch tool, in ​a sharp reversal from more than 50 bps worth of easing expected before the ​war. The Bank ⁠of England and the European Central Bank are also seen tightening policy, with the hawkish sea change in rate expectations hammering bonds and sending yields rising. "A more prolonged disruption to energy supplies would deliver a larger hit to activity that ⁠would ​meet most definitions of a global recession and prompt a broader ​monetary tightening cycle," said analysts at Capital Economics in a note.

Yields on U.S. Treasuries were steady on Friday after a sharp rise overnight, with ​the two-year yield at 3.9776%. The benchmark 10-year yield eased slightly to 4.4097%.

Reuters: The rand was little changed on Thursday, after the South African Reserve Bank kept ​its main lending rate steady at 6.75% saying caution was needed as higher energy prices triggered by the Iran war would push up inflation. At 1345 GMT the rand traded at 17.0025 against the dollar, broadly range-bound. Twenty-one ​of 28 economists polled by Reuters had expected the ​SARB to keep its main lending rate unchanged with ⁠a hawkish outlook. "We warned of elevated risks, and we have been ​proceeding cautiously in our rate setting," Governor Lesetja Kganyago said, reading ​out the decision. "Now a crisis has hit, this prudent approach is proving appropriate."

Independent economist Elize Kruger said the central bank's stance was "correct amid the uncertainty ​and lack of clarity on the duration and impact of ​the Middle-East war." South Africa's annual inflation slowed to the central bank's target of 3% ‌in ⁠February, but analysts said the slowdown could be temporary as the ripple effects of the Iran war will show up in upcoming releases. Commerzbank analyst Volkmar Baur said: "We must wait and see. Should the ​conflict come to ​an end ⁠soon and oil prices return to normal, at least in part, the possibility of an interest rate ​cut is likely to arise again later this ​year."

South ⁠Africa's producer inflation slowed to 1.8% year on year in February from 2.2% in January, statistics agency data showed on Thursday. On the Johannesburg ⁠Stock ​Exchange, the Top-40 index was down 1.9% ​in early trade. South Africa's benchmark 2035 government bond also weakened, as the yield rose ​5 basis points to 9.01%.

Reuters: Asian stock markets were swept up in a global ​rout on Friday, tracking Wall Street lower as the threat of a protracted energy shock out of the war-torn Middle East ‌sent borrowing costs spiralling higher. Investors took a modicum of comfort from U.S. President Donald Trump's decision to extend his ultimatum to strike Iranian power plants by 10 days, after pushing back his initial 48-hour deadline by five days. Brent crude futures fell 1% to $107.07 a barrel having jumped nearly 6% overnight.

However, movement in oil prices was small and reports ​that Trump was considering sending more troops only added to concern about the war escalating into a ground conflict, with no certainty ​that the Strait of Hormuz could be reopened to shipping soon. Iran has dismissed a U.S. proposal to end the ⁠conflict as "one sided and unfair". Wall Street futures bounced 0.2% in Asia. Overnight, the Nasdaq Composite slumped 2.4% to be down nearly 11% from its ​record close on October 29, confirming it has been in a correction since then.

"The Middle East headlines won't stop for the weekend so the weight ​of money leans towards assuming another risk-off week ahead as the U.S. continues to add military resources to the region," said ITC Markets senior FX analyst Sean Callow. "Many see the Iranian regime as holding the upper hand and doubt that there are indeed productive negotiations with the U.S. in process. Underlying pressure towards higher oil prices, USD ​and yields along with weaker equities appears intact."

On Friday, MSCI's broadest index of Asia-Pacific shares outside Japan tumbled 1.4% and was set for a ​weekly drop of 3%. Japan's Nikkei skidded 1.3% and was down 0.9% for the week. South Korea's KOSPI plunged 3%, bringing its weekly loss to a staggering 8.5%. Chinese ‌blue chips ⁠fell 1%, while Hong Kong's Hang Seng index slipped 0.4%. Citi analysts said more severe scenarios of the Middle East conflict could drag global growth below 2% this year, push headline inflation beyond 4% and stoke recession risk.

"Asia, particularly Korea, Japan, and India, faces the most intense headwinds due to heavy reliance on imported fuel and direct exposure to disruptions in the Strait of Hormuz," they said in a client note. Norway's Norges Bank was ​the latest central bank to flag inflation ​risk and interest rate hikes ⁠ahead as the war rages on. Having held policy steady on Thursday, the bank said it expected to raise rates this year, a stark contrast with its earlier forecast of three cuts by the end of 2028. Global ​bond yields jumped anew after the climb in oil prices amplified inflation concern. Japan's 10-year yields rose 4 ​basis points to 2.31%, ⁠while Australia's benchmark 10-year yields surged 7 bps to 5.076%.

The two-year U.S. Treasury yield held steady at 3.9714% on Friday, having jumped 10 basis points overnight as traders priced in more risk of a rate rise from the U.S. Federal Reserve this year, which is about 50% priced in. In currencies, the U.S. dollar was ⁠bathed in ​safe-haven glow having gained for three sessions. The risk-sensitive Australian dollar bore the brunt of ​market selloff, falling 0.2% to a two-month low of $0.6872 after a 0.8% fall overnight.

The euro held at $1.1533 after slipping 0.3% overnight, while the yen hovered at 159.70 a dollar. Market watchers ​expect intervention should the yen hit 160. Gold rose 0.6% to $4,405 an ounce after a nearly 3% fall overnight.

Currency markets never sleep, and news moves fast.

Global economic commentary

Friday, 27 March 2026 ∙ 8 min

Daily Brief

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