The dollar gained ground on Friday, thanks to some surprisingly positive economic data, a more aggressive stance from the Federal Reserve, and ongoing tensions between the United States and Iran.
As the week wrapped up, the dollar was set for its best performance since October, strongly supported by this new economic information and geopolitical concerns that kept traders on alert.
Overnight, the dollar rose further after reports indicated that applications for unemployment benefits in the U.S. dropped more than anticipated, indicating a robust labor market. It maintained its upward trajectory in early Asian trading on Friday, moving away from a sluggish performance, particularly against the British pound, which hovered around $1.3457—its lowest in a month and set to decline nearly 1.5% this week.
The euro also faced challenges. Concerns regarding the future of European Central Bank President Christine Lagarde seemed to pressure the common currency, which fell slightly to $1.1768, putting it on track for a weekly drop of 0.8%.
On the broader dollar index, the currency was just beneath its one-month peak from Thursday, last noted at 97.89. This marked an expected gain of over 1% for the week, reflecting its strongest run in more than four months.
Commonwealth Bank of Australia strategist Joseph Capurso suggested that it wouldn’t be surprising if the dollar keeps rising for a bit longer, pointing to the hawkish tone from recent Fed minutes indicating that several officials are open to interest rate hikes if inflation remains stubborn.
The recent tensions between the U.S. and Iran added a layer of support for the dollar as a safe haven. President Trump recently warned Iran about the need to negotiate on its nuclear program, threatening “really bad things” if they don’t reach an agreement within 10 to 15 days.
“If the situation escalates, it could significantly affect both the oil market and the foreign exchange market,” Capurso commented, also noting that it would test the dollar’s status as a safe-haven asset. “A major attack would certainly bring that into question,” he added.
Market Focus
Looking ahead, market attention is now directed toward upcoming U.S. Core PCE Price Index and preliminary Q4 GDP figures, which are expected to influence the dollar’s direction.
Investors are currently estimating about two interest rate cuts from the Fed this year, yet around 58% anticipate a cut in June, a slight dip from 62% a week earlier, as per the CME FedWatch tool.
The debate within the Fed seems to be heating up. Should they cut rates to support job growth, or keep them elevated to combat inflation? “Friday’s PCE report could add fuel to that debate,” suggested Chris Zaccarelli, chief investment officer at Northlight Asset Management.
Meanwhile, the Australian dollar dipped 0.08% to $0.7055, projecting an overall decline of 0.2% for the week, still buoyed by ongoing high domestic interest rate expectations.
The New Zealand dollar was facing its own challenges. Concerns about the Reserve Bank of New Zealand’s dovish position led to a 1.2% decline for the week. Those who anticipated tightening policies have clearly been caught off guard.
The New Zealand dollar last traded down 0.12% at $0.5967.
In Japan, the dollar fell 0.05% to $155.08, though it did bounce back slightly after data presented the nation’s annual core consumer inflation rate hitting 2.0% in January—the slowest it has been in two years.
“Today’s figures don’t exactly urge the Bank of Japan to resume tightening, especially given the economic setbacks last quarter,” commented Abhijit Surya, a senior economist at Capital Economics for the Asia Pacific region. However, he added, as wage growth picks up and price pressures remain steady, it’s plausible that the central bank may increase rates again in June if the recent slowdown proves to be short-lived.
