A deepening crisis in the Middle East sent the British pound to a six-week low against the U.S. dollar, as investors flock to the safety of the greenback amid renewed inflation fears and a hawkish repricing of Federal Reserve policy.
The British pound fell to $1.34 against the U.S. dollar on Wednesday, its lowest level in six weeks, as the escalating war in Iran triggers a significant flight to safety across global markets. The conflict has pushed energy prices to new highs and reignited inflation concerns, prompting traders to bet on a more aggressive Federal Reserve and sending the U.S. dollar index up more than 1 percent in May.
"The uncertainty over the war's duration has fanned inflation fears and triggered a global bond selloff," said Carol Kong, a currency strategist at Commonwealth Bank of Australia. "We continue to expect the FOMC to start a tightening cycle in December."
The dollar's strength was broad-based, with the euro touching its lowest level since April 8 at $1.16025. Risk-sensitive currencies also retreated, with the Australian dollar hovering near a five-week low at $0.7105. The surge in the dollar has pushed the Japanese yen back toward the 160-per-dollar level, a threshold that previously prompted intervention from Japanese authorities.
The conflict's economic impact is already being felt globally, with the United Nations downgrading its 2026 global GDP growth forecast to 2.5 percent, 0.2 percentage points below its January projection. The report cited higher energy costs, weaker trade, and tighter financial conditions as key headwinds, warning that the crisis threatens to reverse hard-won development gains and slow progress toward sustainable development goals.
The conflict has effectively halted the global disinflation trend that began in 2023. Brent crude futures stood at $110.46 per barrel, significantly above pre-war levels, cascading through supply chains and increasing production costs. In developed economies, inflation is now forecast to rise to 2.9 percent in 2026, up from a previous projection of 2.6 percent, according to the latest World Economic Situation and Prospects report. The uptick is even sharper in developing economies, where inflation is projected to accelerate from 4.2 percent to 5.2 percent.
This has dramatically shifted central bank expectations. Before the war, markets were pricing in two Fed rate cuts. Now, traders see an over 50 percent chance of a rate hike by December, according to the CME FedWatch Tool. This hawkish repricing has sent U.S. Treasury yields soaring, with the 30-year bond yield hitting its highest level since 2007. The upcoming minutes from the Fed's last meeting will be closely scrutinized for any further clues on the central bank's thinking.
The economic fallout is not evenly distributed. While the United States has remained relatively resilient, supported by solid household demand, Europe is more exposed due to its heavy reliance on imported energy. Growth in the European Union is projected to slow to 1.1 percent in 2026, down from 1.5 percent in 2025, with the United Kingdom facing an even steeper moderation from 1.4 percent to just 0.7 percent.
Developing nations are facing a particularly acute crisis. "Rising borrowing costs and renewed capital-flow pressures risk deepening debt vulnerabilities and constraining the resources available for sustainable development at a critical moment,” said Li Junhua, United Nations Under-Secretary-General for Economic and Social Affairs. The hawkish repricing of U.S. rates has already pushed the Indian rupee and Indonesian rupiah to record lows. The crisis is also exacerbating food insecurity, as disruptions to fertilizer supplies threaten to reduce crop yields and push food prices higher.
This article is for informational purposes only and does not constitute investment advice.
