The ongoing conflict in the Middle East has intensified, with Iran-backed Houthi forces in Yemen launching missiles at Israel and threatening to close the Strait of Bab el Mandab, a critical chokepoint for Saudi oil exports. This escalation has heightened geopolitical risks, with the Israeli military expanding operations in southern Lebanon and the US reportedly considering deploying 10,000 additional troops to the region, according to a Wall Street Journal report. Iranian leaders have issued strong warnings against US intervention, further fueling market uncertainty [1][2][4][5].
In currency markets, the US Dollar has emerged as the strongest major currency over the past week, gaining 2.01% against the Australian Dollar and posting notable advances against other G10 currencies. The AUD/USD pair rebounded from two-month lows near 0.6840 but remains capped below 0.6870, with technical analysts at UOB warning of a potential decline toward 0.6765 if support breaks. The NZD/USD pair also bounced from a two-month low of 0.5725 but maintains a bearish bias, with resistance at 0.5840 and downside targets at 0.5700 and 0.5650. The USD/CHF pair rallied to a two-month high near 0.8000, supported by a weaker Swiss KOF Leading Indicator and safe-haven flows into the Dollar. The Swiss National Bank has signaled readiness to intervene to curb excessive Franc strength [1][2][4][5].
Market sentiment remains risk-averse, with investors cautious amid the threat of further escalation and potential disruptions to global energy supply. MUFG analysts highlight that elevated energy risk premia are supporting the Dollar, as higher oil prices and risk-off sentiment feed into US inflation and sustain higher US rates for longer. This dynamic is creating headwinds for risk-sensitive assets, including the Australian and New Zealand Dollars. The possibility of Iran implementing a tolling mechanism at the Strait of Hormuz is also cited as a factor that could prolong uncertainty around energy supply [7].
Despite heightened geopolitical tensions, gold prices have sold off sharply, registering a 15% month-to-date drawdown. HSBC attributes this to gold behaving more like a risk asset in 2026, with ownership shifting toward retail and leveraged players who are forced to liquidate during market stress. The stronger Dollar and higher interest rates have also deterred non-US buyers, challenging the traditional safe-haven narrative for gold. However, HSBC maintains that there is still a decent long-term investment case for gold amid ongoing global de-dollarisation [6].
Looking ahead, markets are closely monitoring upcoming US economic data, including labor market indicators and the ISM PMI, as well as speeches from Federal Reserve Chair Jerome Powell. Any further escalation in the Middle East, especially involving US ground attacks or disruptions at key energy chokepoints, could have significant implications for global markets and risk assets [2][4][5][7].
CONCLUSION
The escalation of the Middle East conflict has driven safe-haven flows into the US Dollar, pressuring risk-sensitive currencies and commodities. Market participants remain cautious, with energy supply risks and geopolitical uncertainty likely to sustain volatility. The outlook for risk assets remains challenging as long as conflict-driven risk premia persist.