The U.S. dollar remained broadly stable in early Asian trading Friday and was poised for its biggest weekly gain in more than a year, as escalating conflict in the Middle East boosted demand for dollars. refuge assets.
The euro and yen remained behind as the crisis pushed oil prices even higher, boosting inflation risks in economies dependent on energy imports and upending policy expectations of the Federal Reserve and other central banks.
Earlier hopes for a de-escalation have given way to new uncertainties, with Iran warning that Washington would “bitterly regret” the sinking of an Iranian warship. US President Donald Trump has said he wants “to be involved in choosing Iran’s next head of state after US and Israeli airstrikes killed Supreme Leader Ali Khamenei early in the war.”
“If conflict in the Middle East continues at its current intensity, it is likely to lead to higher inflation, a stronger U.S. dollar, and a significantly reduced likelihood of a Fed rate cut,” Tony Sycamore, market analyst at IG, wrote in a note.
The dollar index, which measures the greenback against a basket of currencies, was trading slightly down 0.06% at 99.00, still on course for a 1.4% gain this week, which would be the most since November 2024.
The euro was little changed at $1.1612, while the yen gained 0.06% to 157.5 per dollar. Sterling was almost flat, up just 0.04% at $1.3361.
The war intensified on Thursday, with US and Israeli jets hitting areas in Iran and Gulf cities coming under renewed bombardment.
In a telephone interview with Reuters, Trump said Mojtaba Khamenei, son of the late supreme leader and considered the favorite to succeed his father, was an unlikely choice.
The greenback was one of the few winners during a few volatile sessions that dragged down stocks, bonds and, at times, even safe-haven precious metals.
Soaring energy prices caused by the war in the Middle East have fueled fears of a resurgence in inflation, with overnight index swaps (OIS) showing changes in the rate outlooks of major central banks.
Traders have pushed back the timing of the next Fed easing to September or October, according to LSEG estimates. Expectations of rate easing from the Bank of England have also been reduced, while money markets have increased their bets on rate hikes from the European Central Bank as early as this year.
“Fears about what happened to inflation when the Russia-Ukraine war started and what we saw post-pandemic with the supply shocks, that remains somewhat of a priority,” Skye Masters, head of market research at National Australia Bank, said in a podcast. “You see this revaluation in the OIS curves, as well as significant revaluations in the bond markets.”
With the war in focus, currency investors ignored Thursday’s economic data.
The number of Americans filing new claims for unemployment benefits remained unchanged last week, while layoffs fell sharply in February, consistent with stable labor market conditions.
The market is now focused on Friday’s jobs report. Nonfarm job creation likely rose by 59,000 last month, after accelerating by 130,000 in January, a Reuters survey of economists predicted. The unemployment rate is expected to remain at 4.3%.
Jayati Bharadwaj, head of foreign exchange strategy at TD Securities, said she sees opportunity for a near-term adjustment to long dollar positioning given the current tone of risk aversion. But she expects the Iranian conflict to remain contained, especially in a year of U.S. midterm elections.
“(The) rise in the US dollar is only likely to persist as long as risk premia remain high on crude oil, potentially echoing the price action seen in June 2025 until a regime change occurs in Iran with US support,” Bharadwaj said in a note.
The Australian dollar strengthened 0.16% against the greenback to $0.7017. The kiwi rose 0.15% to $0.5903.
In cryptocurrencies, bitcoin fell 0.26% to $70,956.52 and ether fell 0.27% to $2,074.84.
