The bid in Aussie dollar just ahead of RBA’s (Reserve Bank of Australia’s) interest-rate decision says a great deal about how quickly the war in the Middle East is beginning to reshape market expectations. Brent crude’s surged towards USD 90-per-barrel again – after crossing USD 113 and reversing – and diesel markets are tightening as shipping through the Strait of Hormuz faces disruption, so traders are naturally questioning whether the global inflation slowdown that dominated 2025 can survive another energy shock.
Currency markets have responded first. AUD/USD has firmed as investors reassess the likelihood that central banks may be forced to keep policy tighter for longer if energy prices remain elevated. Only weeks ago, markets were still debating the timing of eventual rate cuts across much of the developed world.
But the recent volatility in oil has reopened a very different discussion: whether inflation risks tied to energy and transport costs could force policymakers to delay easing, or even consider renewed tightening. That shift is not theoretical. Brent crude has climbed rapidly amid fears that the conflict could disrupt flows through the Strait of Hormuz, the shipping channel that carries a significant share of the world’s oil and refined fuel exports.
Reports that the International Energy Agency may coordinate one of the largest strategic reserve releases in its history have offered some reassurance, but traders appear sceptical that emergency stockpiles alone can offset prolonged supply disruptions. And increasingly, attention is turning to a market that rarely attracts headlines but sits at the centre of the global economy: diesel.
Diesel fuels freight transport, agriculture and a large share of the heavy industry that keeps global supply chains moving. When diesel prices rise sharply, the consequences travel quickly through the real economy. Higher transport costs push up the prices of food and manufactured goods, while businesses pass on increased logistics expenses wherever they can. Already, quant models are estimating that supply disruptions could place several million barrels per day of diesel at risk if shipping through the Gulf remains constrained. That is why diesel prices have risen faster than crude’s in recent sessions.
This is where the oil shock begins to look less like a temporary geopolitical scare and more like a macroeconomic problem. Central banks spent much of the past two years tightening policy to contain inflation driven in part by energy prices. By late 2025, the consensus view in financial markets was that the worst of the inflation surge had passed and that policymakers would soon be able to pivot toward easing.
The resurgence in oil prices has complicated that assumption. If energy costs remain elevated long enough, they inevitably feed into the real economy. Central banks may then face the uncomfortable prospect of keeping interest rates higher for longer, even as economic growth slows.
Policymakers are already signalling caution. European Central Bank (ECB) president Christine Lagarde has warned against allowing another energy-driven inflation cycle to take hold, while several ECB officials have suggested that the policy outlook could change if energy prices remain elevated. In currency markets, traders have responded by increasing expectations for tighter policy conditions in Europe, even though rate cuts had seemed likely only weeks ago.
Across the Atlantic, expectations for Federal Reserve easing have also been scaled back. Futures markets still anticipate some policy easing later this year, but the pace and scale of those cuts now appear far less certain than they did before POTUS 47 started the Iran war and oil began its recent climb. The impact on inflation expectations has forced investors to reassess the monetary policy path that seemed relatively clear at the start of the year.
Yet the behaviour of traditional safe-haven assets has been strikingly uneven during the turmoil. Historically, geopolitical crises tend to produce a familiar pattern: gold rallies sharply, the Swiss franc strengthens and investors move into government bonds. This time, the dominant refuge has been the US dollar.
The dollar index (DXY) has strengthened about 2 percent since the bombings began, reflecting demand for liquidity and the perceived safety of the world’s reserve currency. By contrast, the Swiss franc has weakened modestly and gold has failed to deliver the kind of explosive rally that typically accompanies geopolitical shocks.
There are several possible explanations. Investors who accumulated substantial profits during gold’s earlier rally may simply be taking gains to offset losses elsewhere in their portfolios. At the same time, renewed inflation fears tied to rising oil prices have pushed Treasury yields higher, strengthening the dollar and shifting some flows toward liquid dollar assets. In such conditions, investors often prioritise liquidity over traditional hedges, allowing the dollar to dominate even when geopolitical tensions would normally favour assets such as gold or the Swiss franc.
USD’s strength therefore reflects more than simple risk aversion. It also reflects uncertainty about how the energy shock will influence global monetary policy. If higher oil prices delay rate cuts or revive inflation fears, the dollar naturally benefits from its role at the centre of the international financial system.
Gold, however, remains part of the story. Although it has not surged in dramatic fashion during the conflict, the metal continues to trade near historically elevated levels following a strong rally over the past year. That suggests investors are still interested in holding protection against long-term monetary uncertainty even if the immediate crisis response has been dominated by the dollar.
Underlying all these market moves is a broader concern that economists have begun discussing more openly: the possibility of a stagflationary dynamic. Energy shocks can simultaneously raise prices and weaken economic activity. Businesses face higher costs while consumers experience reduced purchasing power. Growth slows even as inflation remains stubbornly high.
The global economy is far more diversified today than it was during the oil crises of the 1970s, but the mechanism has not disappeared. If oil prices remain elevated for an extended period, the resulting increase in transport and production costs could place central banks in a difficult position. Tightening policy further risks slowing growth, while easing policy risks allowing inflation to regain momentum.
Markets, therefore, face an unusual mix of uncertainty. The trajectory of oil prices now depends as much on geopolitical developments as on economic fundamentals. The duration of the conflict and the stability of shipping routes through the Strait of Hormuz will likely determine whether the current energy surge proves temporary or evolves into a sustained supply shock.
For now, investors appear unwilling to assume that the disruption will fade quickly. Currency markets are signalling caution through the strength of the dollar and commodity-linked currencies such as the Australian dollar, while energy prices continue to react sharply to developments around the Gulf.
That is why the jump in the Australian dollar ahead of the interest rate decision carries more significance than a routine currency move. It reflects a market beginning to adjust to a reality that policymakers themselves may soon have to confront: wars that disrupt energy markets have a habit of rewriting the economic script far more quickly than central banks can.
Copyright Business Recorder, 2026
The writer can be reached at [email protected]
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