Market Overview: Dollar Strengthens on Geopolitical Tensions
The US dollar index (DXY00) advanced by +0.42% on Friday, buoyed by a confluence of macroeconomic factors. Weakness in equity markets spurred liquidity demand for the greenback, while the ongoing war in Iran elevated its status as a safe-haven asset. Additionally, higher yields on US Treasury notes strengthened the dollar's interest rate differentials.
Support for the dollar also carried over from Wednesday, when Federal Reserve Chair Jerome Powell stated there would be no Fed rate cut unless there is progress on inflation. Consequently, swaps markets are currently discounting a 12% probability of a +25 basis point rate hike at the April 28-29 FOMC meeting.
Despite these gains, the dollar faces headwinds regarding long-term interest rate differentials. The FOMC is still expected to cut rates by at least -25 bp in 2026, whereas the Bank of Japan (BOJ) and European Central Bank (ECB) are projected to raise rates by at least +25 bp during the same period.
Euro Under Pressure from German Data and Energy Costs
The EUR/USD pair (^EURUSD) declined by -0.31% on Friday, weighed down by a stronger dollar and disappointing economic data from Germany. February producer prices in Germany posted their steepest drop in 1.75 years, falling -3.3% year-over-year (y/y), which was weaker than the expected -2.7% y/y decline.
"German Feb PPI fell -3.3% y/y, weaker than expectations of -2.7% y/y and the biggest decline in 1.75 years."
This dovish data for ECB policy coincided with a surge in crude oil prices by more than +2%. As Europe relies heavily on energy imports, rising costs pose a negative factor for the Eurozone economy.
However, hawkish commentary from Joachim Nagel, member of the ECB Governing Council and President of the Bundesbank, provided some support. He noted that "the ECB may need to consider raising interest rates as soon as next month if price pressures build further due to the Iran war." Markets are currently pricing in an 80% chance of a +25 bp rate hike by the ECB at its April 30 policy meeting.
Yen Weakens on Dollar Strength and Holiday Lows
The USD/JPY pair (^USDJPY) jumped +1.02% as the yen fell sharply against the dollar amid higher T-note yields. The currency also suffered from a >+2% surge in crude oil prices, which is particularly bearish for Japan's economy given that it imports 90% of its energy needs.
Trading activity in the yen was notably subdued on Friday due to the Vernal Equinox Day holiday in Japan. Despite the low volume, markets are discounting a +61% chance of a 25 bp BOJ rate hike at their next meeting on April 28.
Precious Metals Retreat Amid Hawkish Central Bank Signals
April COMEX gold (GCJ26) closed down -30.80 (-0.67%), while May COMEX silver (SIK26) fell -1.551 (-2.18%). Both metals surrendered early gains to turn lower, pressured by a stronger dollar and rising global bond yields.
The conflict in Iran has driven energy costs higher, prompting central banks to adopt hawkish stances with threats of tighter monetary policy—a bearish factor for non-yielding assets like gold and silver. The decline accelerated after Joachim Nagel's comments regarding potential ECB rate hikes next month if inflation persists due to the war.
"Also, soaring energy costs from the war in Iran have turned many central banks hawkish this week, with threats to tighten monetary policy, a bearish factor for precious metals."
Despite short-term losses, safe-haven demand remains robust as the conflict shows no signs of ending. Uncertainty surrounding US tariffs, political turmoil, large deficits, and government policy continues to drive demand for precious metals as stores of value.
However, recent fund liquidation has weighed on prices. Long holdings in gold ETFs dropped to a 2.5-month low on Thursday after reaching a 3.5-year high on February 27. Similarly, silver ETF long positions fell to a 6-month low on Thursday following a peak of 3.5 years on December 23.
Conversely, central bank demand remains strong. China's People's Bank of the People (PBOC) added +40,000 ounces to its reserves in January, bringing total holdings to 74.19 million troy ounces. This marks the fifteenth consecutive month of increases.
*Disclaimer: On the date of publication, Rich Asplund did not have positions in any securities mentioned. All information is for informational purposes only.*
Original source
Dollar Gains on Concerns Over a Lengthy War in Iran
Published: Mar 20, 2026
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