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The U.S. dollar strengthened on Friday, supported by mounting concerns that the ongoing war involving Iran could trigger a surge in energy-driven inflation and influence global monetary policy.
By 05:26 ET (09:26 GMT), the U.S. Dollar Index—which measures the greenback against a basket of major currencies—rose 0.4% to 100.13. Meanwhile, the euro slipped 0.5% to $1.1459, and the British pound fell 0.5% to $1.3275 against the dollar.
Iran conflict boosts safe-haven demand
The conflict between the United States, Israel, and Iran, now more than a week old, has shown little sign of easing. U.S. President Donald Trump said Washington was “totally destroying” Iran’s military and economic capabilities, while Tehran signaled its intention to continue resisting.
Iran’s new Supreme Leader Mojtaba Khamenei has stated that the Strait of Hormuz—a vital maritime route through which roughly 20% of global oil supply flows—will remain closed.
The threat of a prolonged disruption to this critical shipping lane has triggered significant volatility in oil markets. Brent crude briefly surged close to $120 per barrel earlier this week, before pulling back below $90. On Friday, Brent futures were trading above $100 per barrel.
Inflation risks strengthen the dollar
Higher energy prices raise the risk of global inflation, as oil and gas flowing through the Strait of Hormuz are essential inputs for industries ranging from transportation to fertilizers and plastics.
Such inflationary pressures could force central banks—including the U.S. Federal Reserve—to delay or reconsider potential interest rate cuts. Higher interest rates tend to attract foreign capital into dollar-denominated assets, strengthening the U.S. currency.
PCE inflation data in focus
Investors are now closely watching the release of the U.S. Personal Consumption Expenditures (PCE) price index later on Friday, one of the Federal Reserve’s preferred measures of inflation.
The core PCE index, which excludes volatile food and energy prices, is expected to rise 3.1% year-on-year in January, slightly above 3.0% recorded in December.
According to analysts at ING, the core PCE measure has been drifting further from the Fed’s 2% inflation target since hitting a low of 2.6% last summer.
PCE running hotter than CPI
Interestingly, recent PCE data has shown stronger inflation readings than the Consumer Price Index (CPI) published by the Labor Department.
This difference largely stems from variations in calculation methods and weighting, particularly regarding housing and healthcare costs. The PCE index assigns less weight to shelter costs—which have been cooling—while giving greater weight to rising medical expenses, keeping the measure elevated relative to CPI.
With inflation indicators diverging and geopolitical risks escalating, markets remain highly sensitive to economic data that could shape expectations for future Federal Reserve policy decisions.
