A selloff in stocks deepened on Tuesday (March 3) and the dollar strengthened as investors considered the implications of US and Israeli strikes on Iran on energy prices and the global economy.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.5 per cent to extend losses for a second day, led by a drop of as much as 4.1 per cent in Korean shares. Tokyo's Nikkei 225 slumped 2.3 per cent and S&P 500 e-mini futures were down 0.6 per cent.

"Economic policy uncertainty was already elevated and now with the Iran conflict, the geopolitical risk is expected to rise too," said Rupal Agarwal, Asia quant strategist at Bernstein in Singapore. "Last time both spiked was in 2022 during the Russia-Ukraine conflict, which didn't work well for Asian markets."

Wall Street stabilized after a volatile session on Monday which saw the S&P 500 rally from an early selloff to close flat and the Nasdaq Composite climb 0.4 per cent as investors bought the dip in markets.

US President Donald Trump sought to justify a broad, open-ended war on Iran, saying on Monday the campaign was ahead of expectations.

With no end to hostilities in sight, an official from Iran's Revolutionary Guards said on Monday that the Strait of Hormuz is closed to marine traffic and the country will fire on any ship trying to pass.

The threat had an immediate impact, pushing the cost of hiring a supertanker to ship oil from the Middle East to China to a record high of more than US$400,000 (S$509,000) a day, LSEG data showed.

After oil and gas prices surged on Monday, Brent crude futures tacked on another 2 per cent to $79.22 on Tuesday. In natural gas markets, benchmark European and Asian LNG prices leapt by around 40 per cent on Monday.

Working through the risk scenarios

The spike in energy prices could ramp up costs for Asian companies and weigh on their profits and their stocks, which have rallied sharply so far this year.

"We estimate a 20 per cent rise in Brent could reduce regional earnings by 2 per cent with wide intraregional variation, but this depends on the duration of the conflict," analysts from Goldman Sachs wrote in a research report. "Spikes in geopolitical risk tend to have a negative short-term effect but dissipate over time," they said. "The current rise in geopolitical risk coincides with regional vulnerability to a correction."

The surge in energy prices complicates the Federal Reserve's efforts to keep inflation under control, with policymakers already showing signs of division around the impact of artificial intelligence on the US economy. The US will take action to mitigate rising energy prices due to a spike in the price of oil caused by the Iran conflict, Secretary of State Rubio said on Monday.

ISM manufacturing data released Monday showed US activity grew steadily in February, but a gauge of factory gate prices raced to a near 3-1/2-year high amid tariffs, highlighting upside pressure on inflation even before the US-led attacks on Iran.

Fed funds futures are pricing an implied 97.5 per cent probability that the US central bank will remain on hold at the end of its next two-day meeting on March 18, according to the CME Group's FedWatch tool. The odds of a June hold, previously below 50 per cent, edged up on Monday and are now slightly better than a coin-toss.

The US dollar index, which measures the greenback's strength against a basket of six major peers, held close to a six-week high at 98.499 as the currency regained some of its allure as a safe haven. The yield on the US 10-year Treasury bond was last down 1.2 basis points at 4.036 per cent.

"Current market dynamics are only showing a mild risk-off tone, insufficient to sustain a firm bid in US Treasury bonds or to nudge the Fed into quicker cuts," analysts from DBS wrote in a research note.

"However, the conflict does raise the spectre of stagflation," they added. "While energy prices are nowhere close to the levels seen during the start of the Russia-Ukraine conflict in 2022, investors will probably be keeping a close eye on the extent and duration that energy supplies will be disrupted."

Gold edged up 0.6 per cent at $5,358.44. Bitcoin slumped 1.5 per cent to $68,399.26, while ether was down 1.5 per cent at $2,013.07.