The conflict in the Middle East is creating exchange rate volatility and inflationary pressures and could send costs spiralling for food and drink businesses on both sides of the Atlantic.
What happened in March?
The dollar benefits from safe haven status
After a rocky 12 months, the dollar surged during March as conflict in the Middle East highlighted its safe haven status. Both sterling and the euro suffered, with investors focusing on Europe’s reliance on Middle Eastern oil.
Good times are over for the euro – for now
The euro was hit hardest by the dollar’s growing strength. The EU currency fell by around 2% against the dollar over the month, despite the eurozone’s settled monetary policy.
Sterling takes a hit
Similarly, the pound slid against the dollar, ending March around 1% down on its US counterpart. Disappointing economic figures during the month did little to help sterling’s cause.
What’s in store for April?
The pound
Much depends on whether the war in the Middle East rumbles on indefinitely or ends in a quick resolution. With the strait of Hormuz closed to most shipping, a prolonged conflict will hit food and beverage businesses because of spikes in the price of fuel, fertilisers and ingredients. At time of writing, the price of Brent crude oil is at its highest since 2022.
If the pound weakens further, UK importers face a double whammy, because more pounds will be required to buy the same amount in dollars, pushing the costs of US goods, raw materials and services even higher.
The euro
Inflationary pressure caused by the conflict in the Middle East has sent economists scurrying to update their forecasts for the year. It’s now expected that headline inflation in the eurozone could hit 2.6% this year from around 2% today. Rising prices may persuade the European Central Bank (ECB) to raise interest rates, something that was considered highly unlikely just a month or two ago. April is likely to bring concrete evidence of rising inflationary pressure and the euro could suffer further falls against the dollar during the month.
As prices for energy, ingredients and equipment rise in April and beyond, food and drink businesses that already operate on tight margins face tough decisions on whether to absorb the extra costs or pass them down the supply chain and ultimately to consumers.
The dollar
The dollar has been a beneficiary of the situation in the Middle East up to now, and that is likely to continue into April. The currency is considered a safer haven than the euro or pound, and one investors turn to in times of uncertainty. As far as monetary policy goes, investors are now considering the possibility of a rate increase in 2026, despite President Trump’s preference for rate cuts. Monetary tightening is not likely in the short term, however, with most economists currently expecting the Federal Reserve (Fed) to hold rates steady this month.
If the dollar strengthens further through April, European food and beverage importers and producers will find sourcing products, equipment and ingredients from the US more expensive. The flipside is that export businesses may experience increased demand from US buyers as their products become cheaper.
The takeaway?
Ultimately, exchange rate volatility in April is likely to be driven by the situation in the Middle East, making investors jittery and pushing up prices for food and beverage importers and producers. An FX strategy could help businesses in the sector protect themselves against exchange rate fluctuations and maintain margins as costs rise.
