Markets Rattle as Iran War Lifts Oil, Dollar

Asian equity markets declined on Monday as the war involving the United States, Israel and Iran entered its fourth week with no sign of easing and threats intensified around the Strait of Hormuz. Japan’s Nikkei 225 (NKY) dropped 3.5%, Australia’s S&P/ASX 200 fell 0.7%, South Korea’s Kospi slid 4.8%, Hong Kong’s Hang Seng lost 2.7% and the Shanghai Composite shed 1.4% in morning trading.

The weakness followed earlier declines indicated in futures, with Japan’s Nikkei futures trading below their previous cash close and Australian and New Zealand shares down as investors reacted to the prospect of “weeks” more fighting. On Wall Street, the S&P 500 (SPX) had already fallen 1.5% on Friday, marking a fourth straight weekly loss, while the Dow Jones Industrial Average (DJIA) dropped 1% and the Nasdaq composite lost 2%.

Selling pressure was broad: roughly three-quarters of S&P 500 (SPX) stocks fell on Friday, and the small-cap Russell 2000 index dropped 2.3%, reflecting concerns that smaller companies may be more exposed to rising borrowing costs.

Oil prices have been on a sharp upward swing since the war began, with Brent crude (UKOIL) moving from about $70 per barrel before the conflict to as high as $119.50. On Monday, Brent (UKOIL) traded around $112 per barrel and U.S. crude near $98, with intraday moves described as choppy but leaving prices up strongly for the month.

Analysts noted significant jumps across the broader energy complex, including a 175% rise this year in Singapore jet fuel and a 130% increase in Asian liquefied natural gas. Higher bunker fuel costs are raising shipping expenses, while surging fertilizer prices are expected to make food more expensive, amplifying inflation pressures across the global economy.

Mizuho Bank’s Ng Jing Wen said that President Donald Trump’s ultimatum to Iran and Tehran’s retaliatory warnings point to a widening conflict that keeps energy disruption and market volatility elevated with no clear resolution yet.

Rising energy costs have led markets to abandon expectations for further monetary easing. Before the war, investors had priced in at least two Federal Reserve rate cuts this year. Futures now show that 50 basis points of expected Fed easing have been erased and some traders see a small chance the next move could be a hike.

The yield on the U.S. 10-year Treasury note has climbed from about 3.97% before the war, according to some sources, to around 4.4%, an eight‑month high, after finishing last week near 4.38%. The two‑year Treasury yield has also risen, to about 3.88%, as markets reassess the Fed outlook. Higher yields are lifting borrowing costs and making equity valuations appear more stretched.

The Fed left its policy rate unchanged last week, with Chair Jerome Powell saying it was too soon to determine the full economic impact of the conflict. The European Central Bank, Bank of England and Bank of Japan also held rates steady but signaled readiness to tighten if energy-driven inflation persists, with the BOJ leaving open the possibility of a hike as soon as April.

The dollar index (DXY) traded above 99.5 on Monday, holding gains as investors sought safety amid escalating threats between Washington and Tehran. The greenback was poised for a rebound after its first weekly decline since the war began, with the dollar index (DXY) last quoted near 99.53.

Against major peers, the euro slipped to around $1.156, while the yen and sterling also weakened modestly versus the dollar in early trading. In separate trading, the dollar rose to about 159.44 yen and the euro eased to $1.1553, reflecting the broader firming of the U.S. currency.

Currency strategists noted that economies benefiting from a positive energy supply shock are expected to fare better than those facing a negative shock. They pointed to the euro and yen as struggling to perform as long as the conflict and energy disruptions continue.