The U.S. dollar slipped slightly on Friday but remains on track to post solid monthly gains. The greenback has been supported by rising geopolitical tensions and a more hawkish tone from the Federal Reserve.
At 03:00 ET (08:00 GMT), the Dollar Index, which measures the U.S. currency against a basket of six major peers, was trading 0.1% higher at 97.650. The index is poised to finish the month up around 1.4%, reflecting steady demand for the dollar.
Dollar Supported by Geopolitical Risks and Fed Outlook
The dollar has drawn strength from concerns that the U.S. military buildup in the Middle East could escalate into a conflict with Iran. Although Washington and Tehran held discussions regarding Iran’s nuclear program, no breakthrough was achieved.
Mediator Oman confirmed that progress was made in Thursday’s talks. However, negotiations ended without a clear agreement that would rule out potential U.S. strikes. According to analysts at ING, any escalation in U.S.–Iran tensions currently holds significant potential to impact the U.S. dollar. Market-based probabilities of a U.S. strike remain elevated, limiting expectations for sustained dollar weakness in the near term.
In addition to geopolitical uncertainty, the greenback has been supported by a slightly more hawkish Federal Reserve. Several policymakers signaled during January’s meeting that further interest rate hikes remain possible if inflation persists above target levels.
Investors are also awaiting the January U.S. Producer Price Index (PPI) report later in the session, along with speeches from Federal Reserve officials John Williams and Neel Kashkari. Short-term drivers continue to favor the upside for the dollar, although renewed tariff uncertainty has helped maintain a risk premium.
Euro Edges Lower Amid ECB Expectations
In Europe, EUR/USD rose 0.1% to 1.1806 but remains on course for a monthly decline of just over 1%. The euro has faced pressure as markets expect the European Central Bank to keep interest rates unchanged for an extended period.
German labor market data showed a modest rise in unemployment in February, with the number of jobless increasing by 1,000 to 2.977 million. Ongoing economic weakness continues to weigh on Europe’s largest economy.
Meanwhile, French consumer prices increased by 1.1% year-on-year in February, exceeding expectations and marking a pickup from January’s multi-year low. Despite this, analysts suggest that the 1.180 level may continue to act as a near-term anchor for EUR/USD, particularly as uncertainty surrounding Iran discourages strong directional positioning.
Pound Faces Political Pressure
GBP/USD gained 0.1% to 1.3495, but the pair is set to break a three-month winning streak with a decline of more than 2% in February.
Political developments in the United Kingdom have weighed on sterling. Prime Minister Keir Starmer’s Labour Party suffered a significant by-election defeat, losing a traditionally safe seat to the Green Party. The result has intensified political pressure on Starmer amid ongoing turmoil and calls for leadership changes.
Market participants have reacted cautiously, as any perceived weakening of the prime minister’s position may increase the likelihood of political instability, adding downside risks for the pound.
Yen Set for Monthly Loss
In Asia, USD/JPY slipped 0.1% to 156.04. Despite the daily decline, the pair is set to gain approximately 0.6% in February, reflecting continued weakness in the Japanese yen.
Investors have raised concerns about the fiscal implications of Prime Minister Sanae Takaichi’s proposed stimulus measures and tax cuts. Her ruling coalition’s supermajority in Japan’s lower house strengthens the likelihood of implementing these fiscal plans.
The yen has also been pressured by uncertainty over the Bank of Japan’s next interest rate move. Tokyo’s February core consumer price index fell below the BOJ’s 2% target for the first time in nearly four years. As Tokyo inflation often signals broader national trends, softer price data may limit the central bank’s ability to tighten policy further.
Chinese Yuan and Australian Dollar
USD/CNY climbed 0.2% to 6.8552 after the People’s Bank of China removed a key foreign exchange risk ratio requirement for certain forward contracts. This adjustment effectively reduces the cost of purchasing dollars domestically.
The move followed a strong rally in the yuan, partly driven by exporters converting dollar earnings amid a robust trade surplus with the United States.
Meanwhile, AUD/USD advanced 0.3% to 0.7125. The Australian dollar is set to rise more than 2% this month, supported by an increasingly hawkish outlook from the Reserve Bank of Australia.
