Dollar Holds Steady Amid Middle East Tensions
The U.S. dollar remained steady on Friday, heading for a positive week as escalating tensions in the Middle East raised expectations of higher inflation and interest rates in the months ahead.
Market Focus on U.S. Payrolls
Investor attention was firmly on the upcoming U.S. nonfarm payrolls report for May, which could provide crucial insights into the labor market and the broader U.S. economy. Currency markets were largely muted as traders anticipated the report, while geopolitical uncertainty surrounding Iran also weighed on sentiment after peace deal negotiations stalled this week.
Hezbollah Rejection Complicates Peace Efforts
Iran-backed, Lebanon-based militant group Hezbollah rejected a ceasefire with Israel, signaling additional challenges for U.S.-Iran peace negotiations. Tehran has emphasized that a Lebanon ceasefire is a prerequisite for any major agreement with the U.S., further complicating diplomatic efforts.
Dollar Index and Currency Movements
The dollar index and its futures remained mostly flat on Friday, yet were positioned for weekly gains as Middle East tensions drove flows into the greenback. Concerns over a prolonged conflict increased expectations for energy-driven inflation, prompting anticipation of a hawkish stance from the Federal Reserve. This scenario bolstered the dollar while putting pressure on other major currencies, including the euro and the pound, which traded flat in morning sessions.
Nonfarm Payrolls in Focus
Payroll growth for May is expected to show a slowdown from the previous month, though recent prints have surprised to the upside in four of the last six months. The report will provide further guidance on potential interest rate adjustments, as the labor market and inflation remain the Federal Reserve’s primary considerations.
Indian Rupee Strengthens Following RBI Move
The Indian rupee was a standout performer, with USD/INR falling nearly 0.7%, retreating from recent record highs. The Reserve Bank of India (RBI) kept interest rates unchanged while lowering its economic growth forecast and raising inflation expectations for the year, signaling potential future rate hikes. RBI Governor Sanjay Malhotra highlighted that the Indian economy remains on solid footing and emphasized that the country has sufficient foreign exchange reserves to defend the rupee.
The RBI intervened multiple times to stabilize the currency, which had slumped to record lows in May due to high oil prices. Meanwhile, other major currencies showed limited movement amid ongoing caution over U.S.-Iran tensions and the upcoming payroll report. The Japanese yen (USD/JPY) hovered just below 160, the Australian dollar (AUD/USD) fell 0.3%, and the Chinese yuan (USD/CNY) remained flat.
