The U.S. dollar remained largely stable in early Asian trading on Friday and was on track for its most significant weekly increase in over a year, as the intensifying conflict in the Middle East heightened the appeal for safe-haven assets. The euro and yen stayed under pressure as the crisis pushed oil prices higher, increasing inflation risks in economies reliant on energy imports and disrupting policy expectations for the Federal Reserve and other central banks. Previous expectations for a reduction in tensions have shifted to new doubts, as Iran cautioned that Washington would “bitterly regret” the sinking of an Iranian warship. U.S. President Donald Trump expressed his desire to participate in the selection of Iran’s next leader following the U.S. and Israeli air strikes that resulted in the death of Supreme Leader Ali Khamenei at the onset of the conflict. “If the Middle Eastern conflict continues at its current intensity, it’s likely to bring sustained higher inflation, a stronger U.S. dollar, and a vastly reduced chance of Fed rate cuts,” stated market analyst Tony Sycamore in a note. The dollar index, which measures the greenback against a basket of currencies, was trading slightly lower by 0.06% at 99.00, still on track for a 1.4% gain this week, marking the most significant increase since November 2024.

The euro remained steady at $1.1612, while the yen increased by 0.06% to 157.5 per dollar. Sterling remained largely unchanged, increasing by only 0.04% to $1.3361. The conflict intensified on Thursday, as U.S. and Israeli aircraft targeted locations throughout Iran, while Gulf cities faced renewed attacks. During a phone interview with Reuters, Trump remarked that Mojtaba Khamenei was an unexpected selection. The dollar emerged as one of the few beneficiaries during a turbulent period that has seen declines in stocks, bonds, and occasionally, even traditionally safe precious metals. The increase in energy prices due to the conflict in the Middle East has heightened concerns about a potential return of inflation, as overnight index swaps indicate changes in the rate expectations for key central banks. Market participants have adjusted their expectations for the next easing by the Fed to either September or October, based on LSEG estimates.

Expectations for rate easing from the Bank of England have been reduced, while money markets have heightened their bets on potential rate hikes from the European Central Bank as soon as this year. “The concerns regarding inflation at the onset of the Russia-Ukraine conflict and the subsequent supply shocks we experienced after the pandemic remain a significant focus,” stated Skye Masters. “You observe that adjustment in OIS curves, and you are noticing some significant adjustment in bond markets as well.” Amid the ongoing conflict, currency investors dismissed the economic data released on Thursday. The count of Americans submitting new applications for unemployment benefits remained steady last week, as layoffs saw a significant decline in February, reflecting stable conditions in the labor market. The market is currently attentive to the employment report scheduled for Friday. Nonfarm payrolls are expected to have risen by 59,000 jobs last month, following an increase of 130,000 in January, according to a survey. The unemployment rate is anticipated to remain unchanged at 4.3%. Jayati Bharadwaj noted that there is potential for a short-term adjustment in long dollar positioning in light of the prevailing risk-off sentiment.

However, she anticipates that the situation in Iran will stay under control, particularly during a U.S. midterm election year. Bharadwaj noted that the U.S. dollar’s upward trend is likely to continue as long as risk premiums in crude oil stay high, possibly reflecting the price movements observed in June 2025, until a significant change occurs in Iran with support from the U.S. The Australian dollar appreciated by 0.16% against the US dollar, reaching $0.7017. The kiwi increased by 0.15%, reaching $0.5903. In the realm of cryptocurrencies, bitcoin experienced a decrease of 0.26%, settling at $70,956.52, while ether saw a decline of 0.27%, now priced at $2,074.84.