The U.S. dollar is poised for its steepest weekly gain in over a year, driven by escalating conflict in the Middle East and a surge in demand for safe-haven assets. The crisis has pushed oil prices higher, fueling inflation risks for energy-importing economies and altering expectations for central bank policy.
Fresh uncertainty emerged as Iran issued a warning to Washington following reports of U.S. and Israeli air strikes. Analysts suggest that sustained conflict could lead to higher inflation, a stronger U.S. dollar, and diminished chances of Federal Reserve rate cuts.
The dollar index, measuring the greenback against a basket of currencies, remains on track for a significant weekly increase. The euro and yen have weakened against the dollar.
The heightened tensions have stoked fears of resurgent inflation, impacting rate outlooks for major central banks. Traders are pushing back anticipated Federal Reserve easing, while markets are increasing bets on European Central Bank rate hikes.
In this risk-off environment, currency investors have largely focused on the geopolitical developments, with upcoming U.S. employment data taking a backseat. The labor market data released showed stable conditions, with unemployment benefit applications unchanged and layoffs dropping sharply in February.
Analysts anticipate the U.S. dollar's upside momentum to persist as long as risk premiums remain elevated in crude oil markets, potentially echoing past price action until a significant geopolitical shift occurs in Iran.