A series of US military strikes against Iranian infrastructure, including targets in the Bandar Abbas region, has triggered heightened risk aversion across global markets, leading investors to seek safe-haven assets and pressuring risk-sensitive currencies such as the New Zealand Dollar (NZD) and Euro (EUR) [1][2][3]. The US Dollar (USD) has benefited from this renewed risk-off mood, with NZD/USD declining by 0.19% on Friday to trade around 0.5830 [1]. EUR/USD also recorded mild losses, trading at 1.1430 after being capped at 1.1480 earlier in the week, as geopolitical tensions and higher oil prices subdued Euro rallies [2].
The conflict escalated as the US carried out strikes for a sixth consecutive day, while Iran’s Islamic Revolutionary Guard Corps (IRGC) threatened intensified retaliation and claimed to have targeted the US Al Udeid Air Base in Qatar [1][3]. Tehran warned that no oil or gas exports would pass through the Strait of Hormuz as long as US attacks persist, raising concerns about disruptions to global energy supplies and supporting defensive assets [1][3]. Iran also threatened to close the Bab el-Mandeb strait, another key corridor for gas and oil traffic [2]. As a result, Brent Crude oil prices surged, closing the week near $85.00, about 18% above early June lows [2].
The risk-off environment has limited gains for Gold (XAU/USD), which traded around $3,992 on Friday after falling to $3,969 on Thursday, its lowest level since July 1 [3]. The US Dollar Index (DXY) recovered to 100.86 after hitting a three-week low of 100.35 earlier in the week, further capping Gold's upside and contributing to its second consecutive weekly loss [3]. Technical analysis indicates subdued momentum for both EUR/USD and XAU/USD, with EUR/USD trading within a 100-pip range and Gold remaining under pressure below key resistance levels [2][3].
On the monetary policy front, the Reserve Bank of New Zealand (RBNZ) recently raised its Official Cash Rate by 25 basis points to 2.5% and signaled potential further hikes due to persistent inflation risks, which have been exacerbated by the Middle East conflict [1]. RBNZ Chief Economist Paul Conway noted that recent developments have increased upside risks to the central bank’s third-quarter inflation forecasts [1]. In the US, despite softer inflation data prompting traders to scale back bets on a near-term Fed rate hike, hawkish remarks from Fed officials and rising oil prices have kept expectations alive for a possible rate increase by December, with markets pricing in a 73% chance according to the CME FedWatch Tool [3].
Currency heat maps show the NZD was weakest against the USD (-0.17%) and strongest against the AUD (+0.13%) on Friday [1], while the EUR was strongest against the JPY (+0.63%) and weakest against the AUD (-0.98%) this week [2].
CONCLUSION
The escalation of US-Iran hostilities has fueled risk aversion, strengthening the US Dollar and oil prices while weighing on risk-sensitive assets like the New Zealand Dollar, Euro, and Gold. Central banks are signaling caution, with the RBNZ highlighting inflation risks and the Fed maintaining a hawkish stance amid rising energy prices. Market volatility is expected to persist as geopolitical tensions and supply disruptions continue to drive investor sentiment.