The U.S. dollar was heading toward its strongest weekly gain in more than a month on Friday. Rising safe-haven demand, escalating tensions in the Middle East and expectations of higher interest rates supported the currency.
At the same time, the Japanese yen was on track for its sharpest weekly decline in more than two months. The currency remained close to four-decade lows against the dollar, despite repeated warnings from Japanese authorities about possible intervention.
The British pound also faced heavy pressure. Sterling was set for its weakest week since mid-June following the appointment of new UK Prime Minister Andy Burnham.
U.S. Dollar Records Strong Weekly Advance
At 16:40 ET, or 20:40 GMT, the U.S. Dollar Index edged higher to 101.49.
The index, which measures the greenback against six major currencies, had gained approximately 0.7% during the week. This marked its strongest weekly performance since June 19.
Demand for the dollar increased as investors moved toward safer assets amid geopolitical uncertainty, rising oil prices and renewed trade tensions.
Middle East Conflict Supports Safe-Haven Demand
The dollar benefited from concerns surrounding the widening conflict between the United States and Iran.
Fighting showed few signs of easing after U.S. Central Command announced that it had completed a 13th consecutive night of strikes against Iran. Tehran responded by targeting American military bases, primarily in Bahrain, Kuwait and Jordan.
Attempts to broker a ceasefire also appeared to be struggling. According to a report from The New York Times, Iran rejected a U.S.-supported ceasefire proposal delivered by Iraqi Prime Minister Ali al-Zaidi.
The continued escalation increased demand for safe-haven assets, including the U.S. dollar.
Oil Prices Climb Above $100
Higher energy prices added to concerns that inflation could remain elevated.
Brent crude futures moved above $100 per barrel on Thursday for the first time since May. The global oil benchmark was also on course for a gain of more than 25% over two weeks.
Prices rose after Iran-backed Houthi militants in Yemen said they had attacked Saudi Arabian tankers in the Red Sea.
The Houthis pose a threat to ships passing through the Bab el-Mandeb Strait, one of the world’s most important energy and trade routes. The Strait of Hormuz, another crucial oil transit point, is also facing increased security risks.
With both shipping routes under pressure, traders have become increasingly concerned about possible disruptions to global oil supplies.
New U.S. Tariffs Increase Inflation Fears
Renewed trade tensions also strengthened inflation expectations.
President Donald Trump introduced new double-digit tariffs on imports from 60 of the United States’ largest trading partners. The announcement came only days after Washington imposed an additional 50% tariff on Canadian goods.
The measures form part of the White House’s effort to restore its aggressive trade policy after previous actions faced legal challenges.
Tariffs can increase the cost of imported goods, while higher oil prices raise transportation and production expenses. Together, these pressures could make it more difficult for inflation to return to the Federal Reserve’s target.
Treasury Yields Rise as Investors Sell Bonds
The increase in inflation concerns was clearly reflected in the U.S. Treasury market.
The benchmark 10-year Treasury yield climbed by approximately 14 basis points during the week. Meanwhile, the more interest-rate-sensitive two-year yield rose by more than 16 basis points.
Bond prices and yields move in opposite directions. Therefore, rising yields indicated that investors were selling government bonds as expectations of tighter monetary policy increased.
Higher Treasury yields also helped support the dollar because U.S. assets became more attractive to yield-seeking investors.
Markets Price in a Possible Fed Rate Hike
Investors have increased their expectations that the Federal Reserve could raise interest rates.
According to the CME FedWatch tool, markets assigned a probability of approximately 62% to the Federal Reserve keeping rates unchanged at its upcoming policy meeting. That figure had stood near 87% one week earlier.
Meanwhile, the probability of a 25-basis-point rate increase climbed to almost 38%, compared with around 13% the previous week.
This significant shift shows how quickly higher oil prices and tariff concerns have changed expectations for U.S. monetary policy.
Inflation Outlook Remains Uncertain
José Torres, senior economist at Interactive Brokers, said that a rate increase at the next Federal Reserve meeting remained possible.
However, he argued that the broader disinflation trend was still intact, despite recent deterioration.
July’s Consumer Price Index was running at around 3.3%, according to Torres. Lower gasoline prices during the first half of the month helped inflation continue slowing from the 4.2% and 3.5% readings recorded in May and June.
Torres added that inflation could improve quickly if tensions in the Middle East ease. Slower growth in housing prices and rents could also provide support for policymakers who prefer a less restrictive monetary stance.
He also suggested that longer-term Treasury bonds may be undervalued if the recent rise in oil prices proves temporary.
Yen Remains Near Four-Decade Low
The Japanese yen traded near 163.84 against the U.S. dollar and was on track to lose approximately 0.9% during the week.
This represented the yen’s weakest weekly performance since mid-May.
Japanese Finance Minister Satsuki Katayama repeated that authorities were prepared to intervene in the foreign exchange market if necessary.
However, the warning provided little support for the currency. The muted reaction suggested that investors remain doubtful about whether verbal warnings alone can reverse the yen’s decline.
The widening gap between U.S. and Japanese interest rates has continued to favour the dollar and place pressure on the yen.
Sterling Suffers Its Worst Week Since June
The British pound fell by approximately 1% during the week, putting it on course for its worst performance since mid-June.
Sterling came under pressure following the appointment of Andy Burnham as the United Kingdom’s seventh new prime minister in a decade.
Investors focused on the new government’s fiscal plans after Burnham reaffirmed his commitment to maintaining the fiscal rules established by his predecessor, Keir Starmer.
Markets also closely monitored the formation of the new cabinet for indications of how the government may approach taxation, public spending and borrowing.
Euro Falls Ahead of September Rate Hike
The euro declined by approximately 0.6% during the week.
The European Central Bank kept interest rates unchanged, as markets widely expected. However, policymakers signalled that an increase in September was highly likely.
ECB President Christine Lagarde said that a less aggressive policy scenario appeared increasingly unlikely.
Expectations of tighter European monetary policy provided some support for the euro, although the currency remained weaker against the dollar during the week.
Central Bank Decisions Take Centre Stage
Currency markets are now preparing for several important central bank meetings.
Alongside the Federal Reserve, the Bank of Japan and the Bank of England are scheduled to announce their latest interest-rate decisions.
Investors will closely examine policy statements for guidance on inflation, economic growth and future rate changes.
Until geopolitical tensions and energy prices stabilise, the U.S. dollar is likely to continue benefiting from safe-haven demand and expectations of tighter Federal Reserve policy.
