Euro at Three-Month Low on Middle East Tensions

The euro extended losses to $1.156, hitting its lowest level since late November, as investors flocked to the dollar amid escalating Middle East tensions. The conflict intensified after Israel struck Beirut on Friday, following an unprecedented evacuation of the entire southern suburbs of the Lebanese capital, a major expansion of its war against Iran, which began a week ago alongside the US. Meanwhile, President Trump claimed a role in choosing Iran’s next supreme leader following Ayatollah Khamenei’s reported death. Rising energy prices are expected to keep inflationary pressures elevated across Europe, strengthening expectations that the European Central Bank may adopt a tighter monetary policy. Several ECB policymakers warned that a prolonged war in Iran drawing in additional countries could push eurozone inflation higher while slowing growth. Money markets currently assign roughly a 55% probability of a July rate hike and an 85% chance of another increase by December.

The euro traded just below $1.16, touching its weakest level since late November, as investors weighed the escalating Middle East conflict and rising inflation risks. Regional tensions intensified after reports that US President Donald Trump encouraged Iranian Kurdish forces in Iraq to target Iran, Azerbaijan warned of retaliation after Iranian missile strikes, and Kuwait said it was intercepting missiles and drones in its airspace. The surge in energy prices triggered by the conflict is expected to keep inflationary pressures elevated across Europe, reinforcing expectations that the ECB may shift toward tighter monetary policy. Several policymakers warned on Thursday that if the war in Iran drags on and draws in additional countries, eurozone inflation could rise while economic growth weakens. Money markets currently assign about a 60% probability of an ECB rate hike in December and a 90% chance of an increase by June 2027.

The euro traded around $1.16, near its weakest level since January 16, as investors assessed the potential fallout from the escalating Middle East conflict alongside rising inflation risks and the prospect of a more hawkish stance by the European Central Bank. The confrontation has intensified, with reports that a US submarine sank an Iranian warship near Sri Lanka and that NATO air defenses intercepted an Iranian ballistic missile fired toward Turkey. The resulting spike in energy prices is expected to sustain inflationary pressures across Europe, reinforcing expectations that the ECB may adopt a tighter monetary policy approach. February data reinforced these concerns, showing annual euro area inflation at 1.9% and core inflation at 2.4%, both above forecasts. Markets now assign roughly a 40% probability of an ECB rate hike by year-end, reversing last week’s similar odds for a cut, and see about a 60% chance of an increase by June 2027.