Dollar Eases Slightly but Heads for Strong Weekly Gain Amid Middle East Tensions

The U.S. dollar edged lower on Friday but remained on track for solid weekly gains as escalating conflict in the Middle East boosted demand for safe-haven assets.

By 04:10 ET (09:10 GMT), the U.S. Dollar Index, which measures the greenback against a basket of six major currencies, slipped 0.2% to 99.095. Despite the modest decline, the index was still set to post a 1.5% weekly gain, its strongest performance since November 2024.

Dollar steadies ahead of payrolls report

The dollar gave back a small portion of its gains as traders locked in profits ahead of the release of the U.S. nonfarm payrolls report later in the session.

Nevertheless, the broader trend remained upward as geopolitical tensions intensified.

U.S. Secretary of Defense Pete Hegseth said late Thursday that “the amount of firepower over Iran is about to surge dramatically,” while Israeli officials announced a broad-scale wave of attacks targeting infrastructure in Tehran.

Iran responded by launching strikes across several countries in the region, including Israel, Gulf states, Cyprus, Turkey, and Azerbaijan, widening the scope of the conflict.

Analysts at ING said that unless a significant diplomatic breakthrough leads to a ceasefire, the dollar is unlikely to resume a sustained decline.

“Unless there can be some real political breakthrough that leads to a ceasefire, the dollar won’t be ready to resume a decline anytime soon,” ING analysts said in a research note. They added that governments are increasingly focused on managing the economic fallout from higher energy prices.

Payrolls data in focus

Market participants are now awaiting the February U.S. nonfarm payrolls report, a key indicator of labor market strength.

Economists expect the U.S. economy to have added 59,000 jobs in February, slowing from 130,000 jobs added in January, while the unemployment rate is forecast to remain at 4.3%.

Some analysts have warned that unusually cold weather in early February could result in weaker job growth. However, ING noted that even if the report disappoints, any decline in the dollar may prove temporary given the heightened geopolitical risks.

Euro heads for weekly decline

In Europe, EUR/USD traded largely unchanged at 1.1607, with the euro set to fall about 1.7% for the week as surging energy prices cloud the outlook for economic growth in the region.

Eurozone gross domestic product data, due later Friday, is expected to confirm 0.3% quarterly growth in the final quarter of last year and 1.3% annual expansion.

Earlier data showed that Eurozone inflation rose more than expected in February, even before the Iran conflict intensified.

European Central Bank policymaker and Dutch central bank governor Olaf Sleijpen said the region’s monetary policy outlook remains broadly stable despite the geopolitical turmoil.

“While I would not use the word nirvana or Goldilocks anymore, I haven’t dramatically changed my view on where we are, which is still a good place,” he said in an interview.

Sterling and yen movements

The British pound saw modest gains, with GBP/USD rising 0.1% to 1.3363, although sterling remained on track for weekly losses of nearly 1% as higher energy prices add pressure to the U.K. economy.

In Asia, USD/JPY traded near 157.55, leaving the pair on course for a 1% weekly rise as the Japanese yen weakened amid rising oil prices that increase inflation risks for energy-importing economies.

Bank of Japan Deputy Governor Ryozo Himino warned that the weak yen is pushing up import costs and could influence underlying inflation trends.

Meanwhile, USD/CNY edged 0.1% higher to 6.8980, extending weekly gains after China announced its lowest economic growth target since 1991.

The Australian dollar gained modestly, with AUD/USD rising 0.4% to 0.7035, though the risk-sensitive currency remained on track for a weekly decline amid global market uncertainty.