Summary: The U.S. dollar held broadly steady in early Asian trade on Friday and was tracking its steepest weekly advance in over a year as the widening conflict in the Middle East intensified demand for safe-haven assets. The euro and yen were pressured while oil climbed, raising inflation concerns for energy-dependent economies and prompting investors to reassess timing for interest-rate changes by the Federal Reserve and other central banks.
Currency markets moved cautiously after hopes for de-escalation gave way to renewed uncertainty. Iran issued a warning that Washington would "bitterly regret" the sinking of an Iranian warship. In addition, U.S. President Donald Trump said he wanted to be involved in choosing Iran’s next head of state after U.S. and Israeli air strikes killed Supreme Leader Ali Khamenei in the early moments of the war. Those developments have pushed investors toward perceived safe havens, including the U.S. dollar.
"If the Middle Eastern conflict continues at its current intensity, it’s likely to bring sustained higher inflation, a stronger U.S. dollar, and a vastly reduced chance of Fed rate cuts," IG market analyst Tony Sycamore wrote in a note, summing up how the market is pricing the intersection of geopolitical risk and monetary policy.
Market moves and data
The dollar index, which measures the greenback against a basket of currencies, was trading slightly lower by 0.06% at 99.00 but remained on course for a 1.4% gain for the week, which would mark the largest weekly advance since November 2024. The euro was little changed at $1.1612, while the yen edged up 0.06% to 157.5 per dollar. Sterling was nearly flat, up 0.04% at $1.3361.
Among commodity-linked currencies, the Australian dollar strengthened 0.16% versus the greenback to $0.7017, and the New Zealand dollar rose 0.15% to $0.5903. In the cryptocurrency space, bitcoin slid 0.26% to $70,956.52 and ether declined 0.27% to $2,074.84.
The conflict’s escalation on Thursday featured U.S. and Israeli jets striking areas across Iran and renewed bombardment of Gulf cities. Those actions intensified the risk premium on crude oil, contributing to the recent energy price spike and prompting fresh scrutiny of inflation trajectories.
Policy expectations and market pricing
Rising energy costs and the heightened risk environment have been reflected in shifts in overnight index swaps (OIS), showing revisions to rate outlooks for major central banks. Market participants have pushed back expectations for the Federal Reserve’s next policy easing to either September or October, based on LSEG estimates. Anticipation of Bank of England easing has also waned, while money markets have increased the likelihood of European Central Bank rate hikes potentially occurring as soon as this year.
National Australia Bank’s head of markets research Skye Masters commented on the persistence of inflation fears tied to geopolitical-driven supply shocks, saying: "The fears of what happened to inflation when the Russia-Ukraine war began and what we saw post-pandemic with supply shocks, that’s still sort of front of mind." Masters noted that such concerns are reflected in repricing both in OIS curves and in bond markets.
Labor market signals and upcoming data
With attention fixed on the conflict, currency traders largely overlooked Thursday’s U.S. economic data. New applications for unemployment benefits were unchanged last week while layoffs fell sharply in February, consistent with a broadly stable labor market. The market’s immediate focus has shifted to Friday’s employment report.
A Reuters survey of economists suggested nonfarm payrolls likely increased by 59,000 jobs last month, following a 130,000 gain in January, and that the unemployment rate probably held steady at 4.3%.
Strategists’ views
TD Securities’ head of FX strategy Jayati Bharadwaj said there could be room for short-term adjustments in long-dollar positioning given the current risk-off tone, but she expects the Iran conflict to remain contained, particularly in a U.S. midterm election year. She added: "(The) U.S. dollar upside should persist only while risk premia remain elevated in crude oil, potentially echoing the price action seen in June 2025 until a regime shift happens in Iran with U.S. backing." Her comment highlights the conditional nature of dollar strength tied to persistent energy risk premia.
Across asset classes, the dollar was among the relatively few winners in a volatile stretch that dragged equities, sovereign bonds and at times even traditional safe-haven precious metals lower. The spike in energy prices stemming from the conflict has therefore had a broad effect on pricing across markets, influencing both risk sentiment and expectations for monetary policy.
Key points
- The U.S. dollar is on track for its steepest weekly gain since November 2024 amid renewed Middle East hostilities and elevated safe-haven flows.
- Surging oil prices have raised the prospect of higher and more persistent inflation, prompting markets to push back expected timing for Fed easing and to reprice ECB and BOE expectations.
- Labor market figures remain broadly stable, but the upcoming U.S. employment report is now a key near-term focus for traders.
Risks and uncertainties
- Further escalation in the Middle East could sustain higher energy prices and inflation, exerting continued pressure on policy expectations - particularly affecting energy-importing economies and bond markets.
- Market repricing of central bank policy - including delayed Fed easing and potential ECB tightening - introduces uncertainty for equity and fixed-income markets.
- Short-term shifts in risk sentiment could prompt rapid adjustments in currency and commodity positions, impacting commodity-linked currencies and global risk assets.