The U.S. dollar nudged higher on Friday, set to cap the week with its most pronounced gain since October as investors reacted to a blend of stronger U.S. data, a hawkish tone in Federal Reserve communications and concerns about possible military confrontation in the Middle East.
At 04:00 ET (09:00 GMT), the Dollar Index, which measures the greenback against a basket of six other currencies, was trading 0.1% higher at 97.920, hovering near the one-month peak seen on Thursday. The index was on track to record a weekly advance of more than 1%, which would be its biggest weekly rise in over four months.
Drivers of dollar strength
The dollar's momentum this week stemmed from several threads that together supported demand. Solid U.S. macro data reinforced perceptions of labour-market resilience, while minutes from the Fed's most recent policy meeting signalled a relatively restrictive policy posture among some officials. In addition, rising tensions between the United States and Iran lent the greenback safe-haven appeal.
Overnight data showed new applications for U.S. unemployment benefits fell by more than expected last week, a release market participants took as further evidence of a steady jobs backdrop. That print followed the Fed minutes, published on Wednesday, which showed officials were divided on the policy outlook but nonetheless reinforced expectations that U.S. monetary policy would remain relatively restrictive.
The core personal consumption expenditures index, the inflation gauge closely watched by the Fed, was due later in the session and was expected to draw attention from traders considering the central bank's next moves.
Geopolitical strains have also helped the greenback's advance. President Donald Trump this week warned Tehran it must make a deal over its nuclear program or "really bad things" will happen. Market strategists noted that until there are more encouraging diplomatic headlines or a sign that military rhetoric has eased, the dollar would likely retain some upside support.
"We suspect markets need to see a few encouraging headlines on diplomatic efforts and less hawkishness on the military threat to sell the dollar in this environment," analysts at ING wrote in a note. "It may be too early to get them today, and risks remain on the upside for USD today."
European and British currencies under pressure
In European trading, EUR/USD slipped 0.1% to 1.1761. The single currency was poised to finish the week down about 0.8%, pressured in part by uncertainty surrounding the tenure of European Central Bank President Christine Lagarde. German producer prices unexpectedly fell by 3.0% year on year in January, a larger drop than the 2.1% decline that had been anticipated, and eurozone composite PMI readings were due later in the session for investors to consider.
Analysts at ING suggested the week's disappointing economic sentiment data could temper enthusiasm for the PMI surveys, though they added that the eurozone composite PMI should remain above the 50.0 threshold that separates expansion from contraction and therefore limit the euro's downside.
Across the Channel, GBP/USD edged down 0.1% to 1.3451, leaving sterling at a one-month low and on course for a weekly loss of around 1.5%. The pound struggled despite strong retail sales numbers for January, which showed monthly growth of 1.8% versus December's 0.4% gain, representing a 4.5% increase on an annual basis. ING noted market pricing implied a 20 basis point rate cut at the Bank of England's March meeting and that another move by June was only partially priced in, while political risk remained a further downside factor for the currency.
Asian markets: yen softens, China quiet, Australia pares gains
In Asia, USD/JPY rose 0.2% to 155.36 as the Japanese yen moved lower following an inflation print that showed headline consumer prices eased to 1.5% in January, a near four-year low and below the Bank of Japan's target. A trimmed measure of inflation that removes fresh food and fuel also slowed, though it remained above target, a development interpreted by markets as a sign that underlying inflation momentum was moderating. That weaker CPI reading raised doubts about the timing of the BOJ's next policy tightening.
Japanese data also showed factory activity expanded at the fastest pace in just over four years in February, a separate release that painted a mixed picture of the economy.
Elsewhere in Asia, USD/CNY traded unchanged at 6.9087 as Chinese markets remained closed for the week. In the Antipodes, AUD/USD fell 0.1% to 0.7042, giving back some of the Australian dollar's earlier gains after data indicated the country's unemployment rate was steady at 4.1% in January, suggesting a still-tight labour market even as employment growth moderated.
What this means for markets
The combination of resilient U.S. data, cautious or divided central bank communications and geopolitical risk helped propel demand for the dollar across a range of pairs this week. Investors will continue to focus on upcoming inflation data and any developments in diplomatic channels that could ease or escalate Middle East tensions, both of which could sway currency flows in the near term.