Key Takeaways

• Dollar holds firm: The DXY and dollar index futures moved little Friday but are set for weekly gains on heightened Middle East tensions.
• Euro and pound flat: Both currencies treaded water ahead of nonfarm payrolls.
• Hezbollah rejects ceasefire: The Iran-backed group refused to halt hostilities with Israel — complicating U.S. peace efforts with Iran.
• Lebanon ceasefire a precondition: Tehran has repeatedly demanded a Lebanon ceasefire before any major deal with Washington.
• Prolonged war boosts dollar: Growing bets on energy-fueled inflation and a hawkish Fed are flowing into the greenback.
• NFP the day’s main event: May payrolls expected to show cooling growth; the print has beaten forecasts in four of the past six months.
• RBI holds rates: India’s central bank kept rates unchanged but trimmed growth forecasts and raised inflation expectations — potentially flagging future hikes.
• Rupee surges: USD/INR fell nearly 0.7%, pulling further back from recent record lows.
• Malhotra’s warning: The RBI Governor cautioned against overspeculating against the rupee, noting sufficient FX reserves to defend the currency.
• RBI intervened repeatedly: The central bank stepped in multiple times in May to defend the rupee against high oil price pressures.
• Yen near 160: USD/JPY hovered just below the intervention trigger level amid continued government warnings.
• Aussie falls: AUD/USD dropped 0.3%; yuan held flat.

The dollar steadied on Friday and was headed for a positive week as worsening tensions in the Middle East buoyed expectations for higher inflation and interest rates in the coming months.

Focus was squarely on upcoming U.S. payrolls data for more cues on the world’s biggest economy, amid increasing headwinds from the war on Iran.

Broader currency markets were largely muted in anticipation of the reading, while uncertainty over Iran also weighed after negotiations over a peace deal appeared to have collapsed this week.

Iran-backed, Lebanon-based militant group Hezbollah rejected a ceasefire with Israel — pointing to more difficulties for the United States in negotiating a peace deal with Iran. Tehran has called for a Lebanon ceasefire before any major peace deal with Washington can be reached.

The euro and the pound were both flat in morning trade.

Dollar Steady as Nonfarm Payrolls Loom; Weekly Gains on Tap

The dollar index and dollar index futures moved little on Friday, but were set for weekly gains as heightened Middle East tensions drove flows into the greenback.

Growing concerns over a prolonged conflict drove up bets on more energy-fueled inflation in the coming months — a scenario that is likely to elicit a hawkish stance from the Federal Reserve. This notion boosted the dollar and pressured most other currencies.

Focus is now on upcoming nonfarm payrolls for May, due later on Friday, for more cues on the economy and interest rates. Inflation and the labor market are the Fed’s two biggest considerations for adjusting interest rates.

Payroll growth is expected to have slowed in May from the prior month. The print has surprised to the upside in four of the past six months.

Indian Rupee Firms Sharply After RBI Holds Rates, Warns on Inflation

The Indian rupee was a standout performer on Friday, with the USD/INR pair falling nearly 0.7% and pulling back further from recent record highs.

Strength in the rupee came after the Reserve Bank of India kept interest rates unchanged. The central bank trimmed its economic growth outlook and raised its inflation expectations for the year — a move that could herald future rate hikes from the RBI.

RBI Governor Sanjay Malhotra said the Indian economy remained on strong footing, and warned against overspeculation against the rupee, stating that the country had sufficient foreign exchange reserves to defend the currency.

The RBI was seen intervening several times in currency markets to defend the rupee, which slumped to a series of record lows in May amid pressure from high oil prices.

Broader currencies kept to a tight range amid caution over Iran and the U.S. payrolls reading. The Japanese yen’s USD/JPY pair hovered just below 160 yen amid continued warnings on forex intervention from government officials.

The Australian dollar’s AUD/USD pair fell 0.3%, while the Chinese yuan’s USD/CNY was flat.