The U.S. dollar was set to finish the week with its best showing since October, supported by a sequence of stronger-than-expected U.S. economic releases, a hawkish tilt in Federal Reserve commentary and renewed tensions between the United States and Iran that have kept investors skittish.
Overnight data showing that new American claims for unemployment benefits fell by more than anticipated added momentum to the greenback by reinforcing perceptions of a resilient labour market. The dollar preserved its gains in early Asian trading on Friday.
Among major pairs, sterling languished near a one-month trough at $1.3457, on track for a weekly decline of nearly 1.5%. The euro similarly eased, down 0.02% at $1.1768 and positioned to give up about 0.8% for the week - a slide the common currency shared amid questions about European Central Bank President Christine Lagarde’s tenure.
Measured against a basket of currencies, the dollar hovered close to Thursday’s one-month high and was last quoted at 97.89. That level left it headed for a weekly gain in excess of 1%, which would mark the greenback’s strongest four-week performance in more than four months.
Market strategists pointed to this week’s release of Fed minutes as a key catalyst. The minutes indicated that several Fed policymakers were open to raising rates if inflation remained sticky, a stance that has lent the dollar additional support.
"It wouldn’t surprise me if the U.S. dollar keeps lifting for a while longer," said Joseph Capurso, a strategist at Commonwealth Bank of Australia, noting the hawkish signals from the Fed minutes.
Geopolitical risk also played a role. Comments from U.S. President Donald Trump warning Iran it must strike a deal over its nuclear programme or face "really bad things" within 10 to 15 days, and Tehran’s subsequent threat to retaliate against U.S. bases if attacked, have heightened concerns of a wider confrontation. Those developments have supported the dollar’s safe-haven status.
Capurso added: "That could really affect oil markets and currency markets if things go bad there. It’ll be a test also about whether or not the U.S. dollar is still a safe haven. A major attack would call that into question."
The market’s focus now shifts to U.S. domestic data scheduled for release later in the day - notably the core personal consumption expenditures (PCE) price index and the advance estimate for fourth-quarter GDP - both of which could determine the next directional move for currencies.
Investor expectations for Fed policy have moderated somewhat. Markets continue to price in roughly two Fed rate cuts over the course of the year, but the probability of a cut in June has eased to around 58% from about 62% a week earlier, according to the CME FedWatch tool.
"The big argument within the Fed is whether or not to proactively lower rates to support the job market, or to keep rates higher for longer in order to fight inflation," said Chris Zaccarelli, chief investment officer for Northlight Asset Management. He noted that Friday’s PCE report will "add to the debate."
Elsewhere in currency markets, the Australian dollar slipped 0.08% to $0.7055 but was forecast to fall just 0.2% for the week, buoyed by domestic expectations for tighter policy. By contrast, the New Zealand dollar faced greater pressure: the kiwi last traded 0.12% lower at $0.5967 and was on course for a roughly 1.2% weekly loss following a Reserve Bank of New Zealand outlook that struck a dovish note and left investors who expected tighter policy badly surprised after a string of cuts over the past year.
In Japan, the yen eased 0.05% to 155.08 per dollar, giving back small earlier gains after data showed Japan’s annual core consumer inflation hit 2.0% in January - the slowest pace in two years.
"Today’s data won’t exactly instil a sense of urgency in the (Bank of Japan) to resume its tightening cycle, especially given the lacklustre rebound in activity last quarter," said Abhijit Surya, senior APAC economist at Capital Economics. He added: "However, if we’re right that the recent slump won’t prove enduring, while wage growth picks up and underlying price pressures remain relatively firm, there is still a strong case for the bank to hike rates again in June."
With the PCE and GDP updates imminent, markets will be watching closely for further signals on inflation and growth that could alter rate expectations, safe-haven flows and currency valuations in the near term.
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