Asian stocks declined on Friday as geopolitical tensions in the Middle East continued to weigh on investor sentiment.

Markets were set for a second consecutive weekly decline as the ongoing conflict involving the United States, Israel and Iran kept oil prices elevated. The surge in energy costs increased fears of rising inflation and economic uncertainty.

MSCI’s broad index of Asia-Pacific shares slipped about 1%, reflecting weakness across regional markets. Japan’s Nikkei index fell roughly 1.4%, while a South Korean technology-focused index dropped nearly 2% during trading.

The cautious mood among investors spread across global financial markets as traders assessed the impact of geopolitical risks.

🛢️ Oil Prices Near $100 Raise Inflation Concerns

Oil prices remained elevated as tensions in the Middle East threatened energy supply routes.

The possibility of disruptions around the Strait of Hormuz, a key global shipping route for oil, contributed to concerns about higher energy costs. These developments pushed crude prices close to $100 per barrel.

Rising oil prices can increase transportation and production costs worldwide. As a result, investors worry that inflation could remain higher for longer than previously expected.

Consequently, markets have begun adjusting their outlook for global monetary policy.

💵 Dollar Strengthens as Investors Seek Safety

During periods of global uncertainty, investors often shift funds into safer assets.

The U.S. dollar strengthened as traders sought stability amid the geopolitical tensions. The currency has risen about 2% since the conflict intensified in late February.

At the same time, the Japanese yen weakened to its lowest level since July 2024, trading near 159 per dollar. Japanese authorities signalled that they were prepared to act if the currency continued to decline.

Currency movements reflected broader uncertainty in global financial markets.

📊 Markets Reassess Interest Rate Expectations

Higher oil prices and inflation risks have also affected expectations for central bank policies.

Investors have sharply reduced their forecasts for interest rate cuts by the U.S. Federal Reserve. Markets now anticipate only about 20 basis points of rate cuts, compared with expectations of roughly 50 basis points last month.

Bond markets have also reacted to the changing outlook. Two-year U.S. Treasury yields reached a six-month high, reflecting reduced expectations for monetary easing.

Analysts said the shift in expectations highlights the growing influence of geopolitical events on financial markets.

🌍 Investors Brace for Continued Market Volatility

Market participants are now closely watching upcoming central bank meetings.

The Federal Reserve, Bank of Japan, European Central Bank and Bank of England are all scheduled to hold policy meetings in the coming week. Most analysts expect these institutions to keep interest rates unchanged for now.

However, economists warn that continued energy price volatility could affect policy decisions in the months ahead.

With geopolitical tensions still unresolved, investors remain cautious about the near-term outlook for global markets.