The euro and yen remained on the back foot as the crisis pushed oil prices higher, inflation risks in an economy dependent on energy imports and raised expectations for policy by the Federal Reserve and other central banks.
Earlier hopes for a reduction in violence gave way to fresh uncertainty, with Iran warning that Washington would “deeply regret” the sinking of an Iranian warship. US President Donald Trump said after the death of Iran’s supreme leader Ali Khamenei in US and Israeli airstrikes in the first moments of the war, he wants to participate in the selection of the next president of Iran.
“If the Middle East conflict continues at its current intensity, it is likely to bring continued high inflation, a stronger US dollar, and a much lower chance of Fed rate cuts,” IG market analyst Tony Sycamore wrote in a note.
The dollar index, which measures the greenback against a basket of currencies, traded 0.06% lower at 99.00, still on course for a 1.4% gain this week that would be the most since November 2024.
The euro was little changed at $1.1612, while the yen gained 0.06% to 157.5 per dollar. Sterling was almost flat, up just 0.04% at $1.3361.
The war escalated on Thursday with new bombings of Iran and Gulf cities by US and Israeli jets. In a telephone interview with Reuters, Trump said the late supreme leader’s son, Mojtaba Khamenei, considered the favorite to succeed his father, was an unlikely choice.
The greenback was one of the few winners in a volatile session that sent stocks, bonds and sometimes even the safe-haven precious metal lower.
A surge in energy prices from the Middle East conflict has fueled fears of a resurgence of inflation, with the overnight index change (OIS) showing a change in the rate outlook for major central banks.
Traders have pushed back the timeframe for the Fed’s next easing in September or October, according to LSEG estimates. Expectations of a rate cut from the Bank of England also receded, while money markets increased bets on European Central Bank rates earlier this year.
“The fear of what happened to inflation when the Russia-Ukraine war broke out and what we saw after the pandemic with supply shocks, it’s still front of mind,” Sky Masters, head of market research at National Australia Bank, said in a podcast. “You’re seeing repricing in the OIS curve, and you’re seeing some meaningful repricing in the bond markets as well.”
With the war in focus, currency investors avoided Thursday’s economic data.
The number of Americans filing new applications for unemployment benefits was unchanged last week, while the number of Americans filing new applications for unemployment benefits fell sharply in February, according to firmer labor market conditions.
The market is now focusing on Friday’s employment report. A Reuters poll of economists forecast that nonfarm payrolls were expected to increase by 59,000 jobs last month after accelerating by 130,000 in January. The unemployment rate is expected to remain steady at 4.3%.
Jayati Bharadwaj, head of FX strategy at TD Securities, said she sees room for a short-term correction in the long dollar position given the current risk exposure. But he expects the Iran conflict to remain, especially in a US midterm election year.
“The rise in the US dollar should only continue if the risk premia in crude oil remains elevated, potentially mirroring prices in June 2025 until US-backed regime change occurs in Iran,” Bhardwaj said in a note.
The Australian dollar strengthened 0.16% to $0.7017 against the greenback. The kiwi rose 0.15% to $0.5903.
In cryptocurrencies, Bitcoin fell 0.26% to $70,956.52, and Ether fell 0.27% to $2,074.84.
