FOREX-Dollar rides safe-haven demand, set for best month since July

By Laura Matthews and Amanda Cooper

NEW YORK/LONDON, March 27 (Reuters) - The dollar headed for its strongest monthly gain in almost a year on Friday, buoyed by safe-haven demand as global risk sentiment deteriorates with the Middle East war intensifying and dampening hopes of de-escalation.

U.S. consumer sentiment slipped to a three-month low in March as war-driven oil price rises weighed on economic outlook.

Iran gave no direct sign that it was ready to negotiate or compromise, despite senior officials saying diplomacy continued. The Islamic Revolutionary Guard Corps reiterated a ban on all shipping linked to allies of the U.S. and Israel.

Markets remained on edge after another volatile week as U.S. President Donald Trump again extended a deadline for striking Iran's energy facilities, even as Washington and Tehran offered starkly conflicting accounts of diplomatic progress.

The Pentagon is also considering sending up to 10,000 more ground troops to the region, the Wall Street Journal reported, further dimming investor hopes of a near-term end to the war.

Safe-haven flows underpinned the dollar, which has also been lifted by rising expectations for a U.S. rate increase this year. The dollar index =USD rose slightly by 0.10% to 99.973, up 2.39% so far in March, on course for its best monthly showing since July 2025, when it rose 3.4%.

"What we are looking at here is higher rates. Markets are coming around to the idea that inflation is about to become a problem again," said Joseph Trevisani, senior analyst, at FX Street in New York.

"The longer that oil stays at these heights, the greater the impact on global economy and the United States as well."

TESTING THE BOJ

The yen JPY= weakened towards 160 per dollar, a level traders see as a possible trigger for official intervention. It remained flat in morning trading at 159.89, after touching 159.98 earlier.

The yen, down 2.4% this month, also came under pressure from another jump in Japanese bond yields after the Bank of Japan published new estimates for its neutral rate that signalled policymakers are prepared to raise rates to counter inflation. Japan's heavy reliance on imported energy leaves it more exposed to higher prices than many other major economies.

The euro EUR= was flat at $1.1529, while sterling GBP= fell for a fourth straight session, slipping 0.16% to $1.3311.

"We’re starting to see that there are concerns that this could be a more prolonged type of conflict," said Marvin Loh, senior global market strategist at State Street in Boston.

"If we are building a longer, more prolonged type of flare-up environment, then long yields start to rise, and from that perspective it is supporting the dollar."

The risk-sensitive Australian dollar AUD= fell to a two-month low before recovering to trade flat at $0.6887. The currency has lost around 3% since the start of the war, making it the second-worst performer among major currencies after the Indian rupee INR=, which is down nearly 4%.

Investors are now pricing in roughly a 70% chance of one quarter-point Federal Reserve hike this year, according to the CME FedWatch tool, a sharp reversal from expectations of more than 50 bps of easing before the war.

The Bank of England and the European Central Bank are also seen tightening policy, part of a broader shift in rate expectations that has hammered bonds and pushed yields to multi-year highs this month.

U.S. Treasury yields inched higher on Friday after jumping overnight. The two-year yield US2YT=RR stood at 3.945%, while the benchmark 10-year yield US10YT=RR was last at 4.43%. US/