Investors are closely watching developments around shipping in the crucial Strait of Hormuz which was disrupted by retaliatory Iranian attacks.

A sharp and prolonged rise in oil prices would severely hurt the economies of Japan and the euro area, which rely heavily on crude imports, while the United States would be relatively insulated, having been a net crude exporter for almost a decade.

"The reaction at the center of everything is that of the oil market," said Thu Lan Nguyen, head of forex and commodity research at Commerzbank.

"Even the news that some OPEC+ countries will expand production more strongly next month than previously planned does little to change this (the economic impact of oil prices), given the fact that most of these countries have only very limited options to export their crude oil via alternative routes," Nguyen added.

Barclays analysts estimated the greenback could strengthen by 0.5%-1% for every 10% increase in oil, arguing the escalation in Iran adds to recent dollar tailwinds via higher energy prices and risk aversion.

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The Israeli military said its air force killed Iran's Supreme Leader Ali Khamenei and his death, at 86, was confirmed by Iranian state media, setting off a high-stakes succession race.

Attacks extended into Monday after Iran hit back, with the Iranian Revolutionary Guard saying it had struck three US and British oil tankers, while blasts were reported over Dubai and Doha.

The US dollar index, a measure of the dollar’s value versus key trading partners, rose 0.74% at 98.37, after hitting 98.566, its highest level since January 23.

The Swiss franc hit a fresh 11-year high against the euro at 0.9028. It dropped 0.43% to 0.7727 against the greenback, but it was trading not far from the decade‑high of 0.7604 touched at the end of January.

The Swiss National Bank said on Monday it was more willing to intervene in foreign currency markets after the conflict in the Middle East.

The euro fell 0.80% to $1.1721, after reaching $1.1698, its lowest since January 22.

"A sustained rise in the oil price by $15 per barrel could raise the level of euro zone consumer prices by almost 0.5% and curtail the gain in disposable incomes accordingly," said Holger Schmieding, chief economist at Berenberg.

After knee-jerk appreciation, the yen weakened 0.61% to 157.005 yen against the dollar. It dropped to 157.25, its lowest since February 9.

"An energy-supply shock represents serious challenges to the Bank of Japan and could also derail Prime Minister (Sanae)Takaichi’s upcoming spending plans, which were already required a strong fiscal offset," said Savage, head markets strategist at BNY.

The yen firmed after Takaichi’s February 8 victory on expectations of stimulus‑driven tightening, before giving up those gains as doubts emerged over a potentially dovish Bank of Japan.

BoJ Deputy Governor Ryozo Himino said the growing market volatility would not prevent the central bank from raising rates, arguing that it was inappropriate to automatically tie its policy decision to market developments.

The risk-sensitive Australian dollar tumbled as much as 1.2% before paring declines to 0.60% and was last trading at $0.7025.

China's yuan in offshore trade was 0.25% weaker at 6.8819 yuan to the dollar, as the People's Bank of China weakened its daily fixing price for the currency onshore to stem appreciation against the greenback. China is an energy importer and the main buyer of Iranian oil.

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