Dollar Poised for Biggest Weekly Jump in Over a Year Amid Rising Middle East Tensions

The U.S. dollar nudged upwards on Friday, on track to post its most significant weekly gain since late 2024. The driving factor? The deepening conflict in the Middle East, which is sending investors scrambling for historically safer assets.

Both the euro and Japanese yen faced downward pressure, weighed down by surging oil prices linked to the turmoil, raising concerns about inflation in countries dependent on imported energy. The shifting dynamics are also causing market forces to reassess policy rate expectations for the Federal Reserve and other central banks.

Initial market hopes for easing tensions in the Iran war swiftly faded as fresh hostilities emerged. Israeli air strikes targeted Hezbollah strongholds near Beirut and critical infrastructure in Tehran, while Iran launched missile attacks directed at Tel Aviv. Meanwhile, U.S. President Donald Trump declared an interest in influencing Iran's leadership selection and urged Kurdish forces in Iraq to intensify actions against Tehran, escalating the conflict further.

According to Lee Hardman, a senior currency analyst at MUFG, the dollar is likely to maintain its strength in the near term. The primary catalyst for this will tie back to energy price shocks; persistent elevated oil prices typically underpin a robust dollar.

Hardman noted, "If the conflict shows signs of winding down and oil prices recede, we could see the US dollar's recent surge unwind quickly. But right now, the scale of the energy price spike is what's keeping the greenback supported."

The U.S. dollar index, measuring the greenback against a basket of major currencies, climbed 0.29% to 99.334 during the session. If maintained, this week's roughly 1.7% gain would be the most pronounced since September 2024.

The euro dipped 0.4% to $1.1564, eyeing a weekly drop of about 2.1%, the sharpest since September 2022. The Japanese yen weakened to roughly 157.86 per dollar, and sterling edged down 0.16% to $1.3331.

Markets overall have been jittery this week. Stocks, bonds, and even typically steady safe-haven metals have faced downward pressures amid the volatile backdrop. "We're seeing a broad pullback from risk across both G10 and emerging market currencies," commented Nathan Swami, head of FX trading at Citi for Asia regions.

The surge in oil caused by the Middle East tensions stoked inflation worries, prompting traders to push back expectations for Federal Reserve rate cuts-now less than one-third probability for a June shift according to CME Group's FedWatch tool. Simultaneously, expectations for Bank of England easing have thinned as markets bet on potential European Central Bank hikes this year.

Aside from geopolitical issues, eyes are also on February's U.S. employment data. Economists forecast nonfarm payrolls rose by 59,000 after January's 130,000 gain, with unemployment steady at 4.3%. A stronger report could push the Fed to further shelve rate cut bets, feeding into global bond market jitters and supporting the dollar's rally.

Cryptocurrencies felt the strain as well, with bitcoin shedding almost 2% and ether similarly down, reflecting risk-off sentiment amid the turmoil.