At 04:10 ET (09:10 GMT) on Friday the Dollar Index - which measures the U.S. dollar against a basket of six major currencies - was trading 0.2% lower at 99.095. Despite the modest intraday pullback, the index was still on track to record a roughly 1.5% increase for the week, which would mark its largest weekly gain since November 2024.
Market backdrop
The dollar surrendered a portion of this week's gains on profit-taking ahead of a key U.S. jobs report, yet the broader trend through the week has been upward as the conflict in the Middle East continues to expand. The evolving military situation has reinforced investor demand for safe-haven assets, a dynamic that has supported the greenback.
Late on Thursday, U.S. Secretary of Defense Pete Hegseth said that "the amount of firepower over Iran is about to surge dramatically." Earlier on Friday, Israeli officials said the country had begun a "broad-scale" wave of strikes targeting infrastructure in Tehran. Iran has responded with strikes that have extended beyond Israel to include targets in the Gulf states, Cyprus, Turkey and Azerbaijan, widening the geographic scope of the confrontation.
Analysts at ING noted the significance of the conflict to currency markets, writing: "Unless there can be some real political breakthrough that leads to a ceasefire, the dollar won’t be ready to resume a decline anytime soon and the story will remain one of governments trying to handle the fallout of high energy prices."
Payrolls and near-term sensitivity
Market participants were cautious into the session's labor-market release, with investors trimming positions to hedge against payrolls volatility. The monthly U.S. nonfarm payrolls report, due later in the session, is forecast to show 59,000 jobs added in February, following an acceleration of 130,000 in January. The unemployment rate is expected to remain unchanged at 4.3%.
ING also highlighted an alternate scenario: "A few are warning of a softer, possibly negative number based on the very cold weather in late January and early February. If so, the dollar could get hit briefly, but losses might not endure given the Middle East risk." That view underscores the competing forces in play - domestic data that could weigh on the dollar in the short run versus geopolitical risk that supports it.
European currencies
In European trading, EUR/USD was largely flat at 1.1607 on Friday. The euro was on track for a weekly decline of roughly 1.7%, pressured in part by higher energy costs that have hurt growth expectations across the region. Eurozone gross domestic product data for the final quarter of last year was due later in the session, with consensus forecasts pointing to a confirmation of 0.3% quarter-on-quarter growth and 1.3% year-on-year expansion.
Data published earlier in the week showed eurozone inflation ran higher than expected in February, before the recent outbreak of hostilities in the Middle East. Speaking on Friday, European Central Bank policymaker and Dutch central bank chief Olaf Sleijpen said the policy backdrop across the euro area had not changed dramatically in his assessment: "While I would not use the word nirvana or Goldilocks anymore, I haven’t dramatically changed my view on where we are, which is still a good place."
GBP/USD inched 0.1% higher to 1.3363 on Friday, leaving sterling on course for a weekly decline of just under 1%. Rising energy prices added pressure to a currency already contending with domestic political challenges.
Asia-Pacific moves
In Asia, USD/JPY traded around 157.55, essentially unchanged on the session but on track to climb about 1% for the week. The Japanese yen has been under pressure as higher oil prices raise inflation concerns in economies heavily reliant on energy imports. Bank of Japan Deputy Governor Ryozo Himino told parliament that "the weak yen was pushing up import costs and may affect underlying inflation."
USD/CNY inched 0.1% higher to 6.8980, with the pair set for weekly gains. The move came during a week in which Chinese authorities announced their lowest growth target since 1991, a policy signal noted by markets.
AUD/USD rose 0.4% to 0.7035 on Friday, but the Australian dollar remained positioned for a weekly loss as risk-sensitive currencies continued to face headwinds amid the conflict and energy-price dynamics.
Implications
Currency markets over the coming days will likely remain sensitive to developments in the Middle East, incoming U.S. economic data and regional growth and inflation figures. The combination of geopolitical escalation and elevated energy prices is acting as a persistent support for safe-haven currencies and the U.S. dollar, while weighing on those economies and currencies more exposed to energy costs and growth concerns.
For now, the dollar's weekly gains reflect both immediate risk-off flows and investor positioning ahead of key data. How long those gains persist will be shaped by whether the conflict expands further or yields to a political resolution, and by the trajectory of U.S. labor-market data when it is released.