Dollar Set for Strong Weekly Gain

The dollar index steadied around 99 on Friday and was poised to gain more than 1% this week, supported by safe-haven demand as the escalating Middle East conflict and rising oil prices unsettled financial markets. The US-Israeli offensive against Iran has now entered its seventh day, while Tehran launched a fresh wave of missile and drone strikes across the Gulf. President Donald Trump also stated he wants a role in selecting Iran’s next leader, dismissing Mojtab Khamenei, son of the late supreme leader, as an unlikely choice. Higher oil prices fueled fears of resurgent global inflation, bolstering bets that the Federal Reserve will delay rate cuts and pressuring currencies of major oil-importing economies. Markets have pushed back expectations for the next Fed rate cut to September or October from earlier projections of July. The dollar gained most against the euro this week, reflecting Europe’s heavy reliance on Middle East oil.

The dollar index rose to 99.1 on Thursday, its highest level since mid-January, as the escalating conflict with Iran revived safe-haven demand. Early relief faded as the was is in its sixth day. Both Iran and the US signaled that attacks could intensify in the coming days, pushing oil and natural gas prices higher, reigniting inflation concerns and prompting traders to scale back expectations for Fed's rate cuts to just one this year, down from two earlier in the week. Meanwhile, recent economic data reinforced the strength of the US economy. Initial claims came in below forecasts, productivity rose more than expected last quarter, job cuts declined sharply, and the ISM Services PMI showed the sector unexpectedly expanding at the fastest pace since mid-2022. Investors are also viewing the US as a relative safe haven given its greater energy independence, further supporting the currency. The greenback posted the strongest gains against the Australian dollar, the yen, and the euro.

The dollar index rose back above 99 on Thursday, reversing losses from the previous session as the US-Iran conflict intensified following the sinking of an Iranian warship by a US submarine off the coast of Sri Lanka. The broader US-Israeli campaign against Iran has now entered its sixth day, keeping markets alert to further escalation and the potential for a protracted conflict that could weigh on economic growth and fuel inflation. On Wednesday, the dollar pulled back after reports emerged that Iranian operatives had reached out to the US to explore possible peace talks, though Tehran later denied the outreach. Meanwhile, Treasury Secretary Scott Bessent said President Donald Trump’s recently announced 15% global tariff is likely to take effect later this week. On the economic data front, US services activity rose to a more than 3½-year high in February, while private-sector employment growth exceeded expectations.