Dollar Strengthens as Middle East War Drives Safe-Haven Demand
The U.S. dollar strengthened against a basket of major currencies on Friday, putting it on track for a second consecutive weekly gain. Investors shifted funds into safe-haven assets as tensions in the Middle East intensified, while currencies sensitive to energy prices—such as the euro—came under pressure.
President Donald Trump said the United States would be hitting Iran “very hard over the next week,” shortly after announcing a partial 30-day waiver allowing purchases of sanctioned Russian oil. The move aims to help stabilize fuel prices that have surged amid the ongoing U.S.–Israeli conflict with Iran.
A prolonged increase in oil prices could significantly harm economies that rely heavily on crude imports, particularly Japan and the euro area. By contrast, the United States would be relatively insulated because it has been a net exporter of crude oil for nearly a decade.
Karl Schamotta, chief market strategist at Corpay in Toronto, said global investors are reducing cross-border exposure and moving capital toward safer assets.
According to Schamotta, this shift is pushing money into traditional safe havens while weakening currencies issued by countries that depend heavily on energy imports.
Euro Weakens as Dollar Index Rises
The euro fell 0.4% against the U.S. dollar, trading at $1.1466. Meanwhile, the dollar index—measuring the greenback’s performance against a basket of major currencies—rose 0.4% to 100.10. For the week, the index gained around 1.1%, marking its second straight weekly advance.
Despite the dollar’s strength, Schamotta warned that the foreign exchange market faces potential volatility in both directions.
He noted that as the conflict continues, both Tehran and Washington may have incentives to return to negotiations. There are increasing expectations that the two sides could reach a face-saving agreement as soon as the weekend.
Inflation Data Clouds Federal Reserve Outlook
New data released on Friday showed U.S. consumer spending rose slightly more than expected in January. Combined with persistent inflation pressures and geopolitical tensions, the figures reinforced economists’ expectations that the Federal Reserve may delay interest rate cuts.
Sonu Varghese, global macro strategist at Carson Group, said the latest personal consumption expenditures inflation data indicates inflation concerns were already present before the Middle East crisis intensified.
According to Varghese, the Federal Reserve already faces significant challenges in controlling inflation, and the current geopolitical environment could worsen the situation. As a result, the central bank may postpone rate cuts until 2026 and could even consider discussing potential rate hikes later this year.
Since the escalation of the Iran conflict pushed oil prices higher two weeks ago, traders had moved expectations for the first Fed rate cut to as late as December. However, current market pricing suggests investors now anticipate the next rate cut to occur around September.
Euro Faces Pressure Ahead of ECB Meeting
Investors are now turning their attention to the European Central Bank’s policy meeting scheduled for next Thursday. Some traders believe rising oil prices could force the ECB to consider tightening monetary policy later this year.
Nevertheless, economists remain cautious. Higher energy prices tend to weigh heavily on economies that depend on fuel imports, raising concerns about slower economic growth across Europe.
Jane Foley, head of FX strategy at Rabobank, noted that disruptions to shipping through the Strait of Hormuz could persist for some time.
Due to these risks, Rabobank has lowered its short-term forecast for the EUR/USD exchange rate. The bank now expects the pair to trade around 1.14 over the next month and approximately 1.15 within three months, down from previous estimates of 1.16.
Yen Slides Toward Intervention Levels
The Japanese yen weakened to 159.69 per dollar, its lowest level since July 2024, before recovering slightly to trade 0.1% higher at 159.20 per dollar.
Japan’s Finance Minister Satsuki Katayama said authorities are prepared to take necessary action if currency movements begin to significantly impact households and businesses. She also confirmed that Japanese officials remain in close contact with U.S. authorities regarding foreign exchange developments.
Analysts warn that policymakers may grow increasingly concerned about the impact of a weak yen on already high import costs. This could increase the likelihood of government intervention to stabilize the currency in the coming weeks.
Bitcoin Hits Nine-Day High
Meanwhile, leading cryptocurrency bitcoin gained 4.5%, climbing to $73,374 and reaching its highest level in nine days as investors continued to monitor global market developments.
