Dollar Positioned for Strongest Weekly Gain in Four Months Amid Hawkish Fed and Rising Geopolitical Tensions
The U.S. dollar is on track to record its best weekly performance since October, supported by robust economic data, a more hawkish stance from the Federal Reserve, and escalating geopolitical tensions between the United States and Iran.
Economic Indicators Bolster Dollar Strength
Early Friday trading saw the dollar maintain gains after overnight data revealed a larger-than-expected decline in new applications for U.S. unemployment benefits, signaling continued stability in the American labor market. This positive labor data contributed to investor optimism in the dollar’s outlook.
In currency markets, sterling hovered near a one-month low, last quoted at $1.3457, poised for a weekly loss approaching 1.5%. The euro also edged slightly lower by 0.02% to $1.1768 and was on course for a 0.8% decline over the week. European markets remain cautious amid uncertainty regarding the tenure of European Central Bank President Christine Lagarde, which weighed on the euro’s performance.
Against a basket of major currencies, the dollar remained close to a one-month high, last standing at 97.89, marking a weekly gain exceeding 1%, an increase not seen in more than four months.
Federal Reserve’s Hawkish Outlook Supports Dollar
Market strategists point to the Federal Reserve’s recent minutes, which revealed that several policymakers remain open to increasing interest rates if inflationary pressures persist. Joseph Capurso, a strategist at Commonwealth Bank of Australia, commented, “It wouldn’t surprise me if the U.S. dollar keeps lifting for a while longer,” emphasizing the Fed’s hawkish tone as a key driver behind the dollar’s momentum.
Investors continue to anticipate roughly two rate cuts by the Fed within the year, though the probability of an initial cut by June has slightly decreased—from about 62% a week ago to around 58%—according to the CME FedWatch tool. The market debate centers on whether the Fed will proactively lower rates to support employment or maintain higher rates to combat inflation.
Upcoming U.S. economic reports, including the core Personal Consumption Expenditures (PCE) price index and advance fourth-quarter GDP data, are expected to provide further direction for currency movements. Chris Zaccarelli, chief investment officer at Northlight Asset Management, noted that the data will "add to the debate" on the Fed’s next move.
Geopolitical Risks Add Safe-Haven Support
Heightened tensions between the U.S. and Iran have also lent additional support to the dollar’s safe-haven appeal. U.S. President Donald Trump issued a stern warning to Iran on Thursday, demanding a resolution to its nuclear program within 10 to 15 days or facing “really bad things.” Iran responded with threats to retaliate against U.S. military bases in the region if attacked.
Joseph Capurso noted the potential impact of escalating conflict: “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.”
Currency Market Highlights Elsewhere
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The Australian dollar was slightly weaker at $0.7055, down 0.08%, but it is set for a modest weekly loss of just 0.2%, buoyed by expectations of hawkish domestic interest rate policy.
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Conversely, the New Zealand dollar struggled, trading down 0.12% to $0.5967 and facing a 1.2% weekly decline. This weakness follows the Reserve Bank of New Zealand’s dovish rate outlook, which surprised investors betting on tighter monetary policy.
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Japan’s yen slipped 0.05% to 155.08 per dollar, retreating from earlier gains despite data showing annual core consumer inflation of 2.0% in January—the slowest pace in two years. Economists suggest that while current data do not push the Bank of Japan to resume tightening immediately, underlying inflation pressures and wage growth may warrant a rate hike around June.
As the week concludes, market participants remain focused on the interplay of U.S. monetary policy signals, economic data releases, and geopolitical developments that continue to shape the dollar’s trajectory.
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