Euro Drops as Middle East Crisis and US Inflation Lift Dollar

The euro fell to $1.15 as investors sought safety in the dollar, driven by escalating Middle East tensions and stronger-than-expected US PPI data ahead of pivotal central bank meetings. On Wednesday, Israel targeted Iran’s Asaluyeh refinery and the South Pars gas field, while Iran’s Revolutionary Guard issued evacuation alerts for oil facilities in Saudi Arabia, the UAE, and Qatar, heightening geopolitical risks. Adding to the pressure, US producer prices surged 0.7% in February, far exceeding the forecasted 0.3%, with the annual rate hitting a one-year high of 3.4%. Market focus now shifts to this week’s ECB and Federal Reserve policy meetings, where interest rates are expected to remain unchanged. ECB President Christine Lagarde is anticipated to outline strategies to protect the Eurozone from inflationary pressures linked to the ongoing conflict.

The euro held steady at $1.15, attempting to recover from a recent decline that saw it hit its lowest level since last July. Investors remained focused on escalating Middle East tensions, disappointing German confidence data, and a packed week of central bank decisions. US President Donald Trump suggested military operations in Iran would extend beyond this week, while Israeli officials warned the conflict could last "several more weeks." On the economic front, German investor morale plunged in March amid fears that rising prices could derail the country’s recovery. Attention now turns to the European Central Bank’s policy meeting on Thursday, where interest rates are expected to remain unchanged and ECB President Christine Lagarde is anticipated to address how the bank plans to shield the eurozone from inflationary pressures tied to the conflict. Markets now fully price in a July rate hike, with an 85% chance of a second increase by year-end.

The euro traded above the $1.14 level after a recent slide that pushed the common currency to its weakest point since last July, as the US dollar strengthened broadly amid escalating tensions in the Middle East. On Monday, Israeli officials indicated that the country is preparing for a potential escalation in its conflict with Iran in the coming days, warning the war could continue for “several more long weeks.” Meanwhile, oil prices have remained above $100 per barrel, underscoring Europe’s ongoing vulnerability to energy shocks. Attention is now shifting to the upcoming policy meeting of the European Central Bank on Thursday. Traders expect President Christine Lagarde to outline how the central bank intends to protect the eurozone economy from inflationary pressures linked to the conflict and surging energy prices. Money markets are currently fully pricing in a ECB rate hike by July, with roughly an 85% probability of a second increase by the end of the year.