The US dollar hovered near a 10-month high on Monday and is on track to post its largest monthly gain since July, as mixed signals from Iran and the United States weakened hopes for a swift end to the conflict in the Middle East.

US President Donald Trump said that Irans new leaders were very rational, as additional US forces arrived in the region, while Tehran warned that it would not accept humiliation.

Meanwhile, the Japanese yen hovered near the critical 160 per dollar level after hitting its weakest level since July 2024, a threshold at which Tokyo previously intervened to support its currency. The euro, on the other hand, found some support from expectations of interest rate hikes by the European Central Bank.

Hormuz tensions support the dollar

Markets have experienced sharp volatility this month after the conflict with Iran effectively led to the closure of the Strait of Hormuz, a vital waterway through which about one-fifth of global oil and gas flows pass, while Brent crude futures continued to gain after Yemens Houthi group launched its first attacks on Israel.

The dollar has benefited from its safe-haven status since early March, as economies such as Japan and the eurozone have been hurt by rising oil prices, while the United States has relatively benefited as a net exporter of crude oil.

Barclays noted that market sentiment toward the dollar is approaching extreme optimism levels based on its indicators, which rely on traditional measures including growth expectations, interest rate differentials, and risk indicators.

The dollar index rose 0.1% to 100.28 points, after reaching 100.54 in mid-March, the highest level since May 2025, and is heading for its largest monthly gain since July 2025.

Chris Turner, Head of Global Foreign Exchange Strategy at ING, said: Unless clear and conciliatory messages come from the Iranian side, it will be difficult for the dollar to give up its gains achieved this month anytime soon.

US jobs data in focus

Investors are closely watching US employment data due later this week, which could influence expectations for the Federal Reserves policy path.

Bob Savage, Head of Market Macro Strategy at BNY, said: In the midst of the storm, this week delivers a critical set of US labor market data.

He added: After a weak February jobs report and a full month of conflict in the Middle East, we are keen to see how labor market conditions have been affected.

European interest rate outlook

The euro traded near $1.15 and is heading for a decline of about 2.5% in March, its largest monthly drop since July.

Thu Lan Nguyen, Head of FX and Commodity Research at Commerzbank, said the euro would have declined further against the dollar were it not for market expectations of a more hawkish stance from the European Central Bank.

She added that downside risks for the euro/dollar pair will remain limited as long as expectations of tighter European monetary policy persist.

Before the outbreak of the conflict, markets were pricing more than a 50% probability of rate cuts in Europe, but are now pricing in the possibility of a rate hike before the end of the year.

Yen nears intervention level again

The Japanese yen rose 0.40% to 159.65 against the dollar after hitting 160.47 during Asian trading, its weakest level since July 2024.

The move came after Japan intensified warnings of intervention to support the currency, noting that further depreciation could justify a near-term interest rate hike. The yen had fallen more than 2% during March due to concerns over rising oil prices.

Among other currencies, the Australian dollar fell 0.3% to $0.6851 and is heading for a monthly loss of 3.8%, its largest since December 2024. The New Zealand dollar also declined 0.4% to $0.57275, recording a drop of about 4.4% during March.