Finance
Currencies take a beat as dollar rally pauses
Published by Global Banking & Finance Review®
Posted on March 5, 2026
3 min readLast updated: March 5, 2026
Quick Summary
The dollar paused its sharp rally around March 5, 2026, easing from three‑month highs and offering relief to the euro and other currencies amid hopes—but not confirmation—of Middle East de‑escalation, mixed U.S. data, and China’s revised, cautious 2026 growth outlook.
Dollar edges higher as Middle East war boosts safe-haven demand
Market Reactions and Currency Movements Amid Middle East Conflict
By Niket Nishant and Rae Wee
LONDON/SINGAPORE, March 5 (Reuters) - The dollar resumed its climb on Thursday after a brief retreat from three-month highs as the fallout from the Middle East conflict kept investors on edge and prompted a flight to the safe-haven currency.
Geopolitical Tensions and Investor Sentiment
Earlier hopes of a de-escalation gave way to a fresh bout of uncertainty, with Iran warning that Washington would "bitterly regret" the sinking of an Iranian warship off Sri Lanka.
That kept the dollar in favour, leaving the euro down 0.12% at $1.1619 and sterling 0.17% lower at $1.3352.
The dollar index, which measures the greenback against a basket of six other currencies, was last up 0.11% at 98.91.
"Everyone is fumbling around in the dark," said Nick Rees, head of macro research at Monex.
"Most investors recognise that they do not have a high level of confidence when it comes to the outlook over these tensions, and it is leaving markets highly reactive to even small headline developments."
Safe-Haven Assets and Market Volatility
'NO ESCAPE'
"There appears to be little to no escape. Traditional safe havens, such as gold, are not playing their usual part," said Bas van Geffen, senior macro strategist at Rabobank.
"Considering the sharp appreciation of the DXY index, dollar liquidity appears to be king."
The dollar has risen nearly 1.3% for the week thus far, emerging as one of a handful of winners in a volatile few sessions that have dragged stocks, bonds and, at times, even safe-haven precious metals lower.
Energy Prices and Inflation Fears
The spike in energy prices from the Middle East war has stoked fears of a resurgence in inflation that could derail the rate outlooks for major central banks.
Traders are now pricing in just a 31.5% chance of a Federal Reserve rate cut in June, as compared with a near 46% chance a week ago, according to the CME FedWatch tool, though that has in part been driven by upbeat U.S. economic data on Wednesday.
Rate easing expectations from the Bank of England have also been pared back, while money markets increased bets on European Central Bank rate hikes as early as this year.
"In addition to market participants, it is central bankers who are now increasingly eyeing the return of inflation as a concern," said Thierry Wizman, global FX and rates strategist at Macquarie Group.
"It is the U.S.' rate outlook that is seen to have the greatest potential to be overturned by another burst of global inflation in 2026, if energy supplies become constrained."
Global Currency and Crypto Market Updates
The yen similarly reversed early gains and was last 0.1% lower at 157.16 per dollar.
China’s Economic Outlook and Yuan Performance
Elsewhere, China set its economic growth target for 2026 of 4.5% to 5% on Thursday, a slight downgrade from the 5% pace achieved last year, which leaves room for greater - although not decisive - efforts to curb industrial overcapacity and rebalance the economy.
The yuan rebounded from a one-month low and was last trading flat at 6.8951 per dollar, after the People's Bank of China set its guidance at the strongest in nearly three years.
Cryptocurrency Movements
In cryptocurrencies, bitcoin and ether fell more than 1% each, after strong gains in the previous session.
(Reporting by Niket Nishant and Rae Wee; Editing by Thomas Derpinghaus and Jacqueline Wong)
Key Takeaways
- •The U.S. dollar index eased from over three‑month highs, giving respite to the euro and yen as geopolitical tensions—notably in the Middle East—showed tentative signs of improvement based on unverified reports.
- •Upbeat U.S. services data bolstered the dollar’s strength, though markets remain wary of oil‑driven inflation risks that could affect central bank rate paths, particularly for the ECB and BoE.
- •China lowered its 2026 GDP growth target to a 4.5%–5% range, signaling caution amid structural headwinds and reinforcing softer global growth expectations, which influenced currency sentiment.
Frequently Asked Questions about Currencies take a beat as dollar rally pauses
1Why did the dollar rally pause?
The dollar rally paused as markets reacted to reports of potential talks on the Middle East conflict and upbeat U.S. economic data.
2How did the euro and sterling perform?
The euro rebounded slightly from three-month lows and sterling steadied, as the dollar eased against major currencies.
3What impact did the Middle East war have on currencies?
The Middle East war led to a rise in energy prices, fueling inflation fears and affecting rate outlooks for major central banks.
4How did risk-sensitive currencies like the Australian dollar behave?
Despite being risk-sensitive, the Australian dollar gained as Australia's energy abundance offset the impact of rising oil prices.
5What were the trends in Bitcoin and ether during this period?
Bitcoin and ether both fell about 1% each, after a strong rally as market risk appetite improved.