The U.S. dollar edged lower on Friday, but was set for its first monthly gain since October last year, helped by heightened geopolitical tensions and a more hawkish tone to the Federal Reserve.
At 15: 11 ET (20:11 GMT), the dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 97.59, but was on track for monthly gains of around 0.6%.
Dollar helped by elevated geopolitical tensions
The dollar has been helped by worries that the U.S. military build up in the Middle East will lead to a conflict with Iran, even as the two sides met to discuss Tehran’s nuclear program.
The United States and Iran made progress in talks on Thursday, mediator Oman said, but hours of negotiation ended with no sign of a breakthrough that could avert potential U.S. strikes.
President Donald Trump told reporters on Friday that he wasn’t “exactly happy with the way” Iran was negotiating.
“I’m not happy with the fact that they’re not willing to give us what we have to have. I’m not thrilled with that. We’ll see what happens. We’re talking later…No, I’m not happy with the way they’re going,” Trump said.
“We still see any escalation in U.S.-Iran tensions as having the most potential for a U.S. dollar impact at this stage,” analysts at ING said in a note. “Polymarket probability of a U.S. strike on Iran by end-March remains somewhat elevated at 55% though, and we think this is preventing markets from chasing dollar depreciation much further for the time being.”
The U.S. currency has also been helped by a slightly more hawkish Federal Reserve after “several” policymakers signaled at January’s policy meeting their openness to rate hikes if inflation remains elevated.
January’s U.S. PPI report on Friday came in much hotter than expected.
“Short-term drivers still point firmly to the upside for USD, but fresh tariff uncertainty has added a reason to keep the USD risk premium intact. We expect stabilization in the dollar today, barring major geopolitical news,” ING added.
Euro slightly lower in February
In Europe, EUR/USD traded 0.2% higher to 1.1822, with the single currency heading for a monthly loss of about 0.2% amid expectations that the European Central Bank will keep rates steady for months to come.
The number of unemployed people in Germany rose slightly in February, gaining 1,000 to 2.977 million in February, as the economic weakness of the past three years continues to weigh on the job market in Europe’s biggest economy.
French consumer prices rose more than expected in February, climbing 1.1% year-on-year, a sign of acceleration after they slowed to their lowest in more than five years in January.
“We sense that 1.180 can keep acting as an anchor for EUR/USD in an environment where great uncertainty on Iran seems to be discouraging strong directional views,” ING said.
GBP/USD was flat at 1.3485, but was set to snap three straight months of gains with a fall of about 1.5% in February.
Prime Minister Keir Starmer’s Labour Party suffered an embarrassing election defeat on Friday, losing one of its safest seats to the left-wing Green Party.
This puts further pressure on Starmer to prove that he should keep his job following weeks of political turmoil and calls for him to resign.
“Anything that is seen weakening the position of Prime Minister Keir Starmer has hit the pound as of late, and the success of a more left-wing party (Greens) in this special election might increase the perceived possibility of a more leftish successor to Starmer should he leave office early,” ING added.
Yen heading for monthly loss
In Asia, USD/JPY fell 0.1% to 156.00, but the pair is set to rise 0.8% in February, with the Japanese currency struggling as markets questioned the fiscal impact of Prime Minister Sanae Takaichi’s stimulus and tax break plans.
Takaichi was seen having a clear path towards her fiscal plans after her ruling coalition won a supermajority in Japan’s lower house of parliament.
Weakness in the yen also came amid increasing doubts over when the Bank of Japan will raise interest rates next – questions which were furthered by soft consumer price index inflation data from Tokyo for February.
The print, which usually acts as a bellwether for national inflation, showed core CPI falling below the BOJ’s 2% annual target for the first time in nearly four years – a trend that is likely to limit the central bank’s plans for more rate hikes.
USD/CNY traded 0.3% higher to 6.8579 after the People’s Bank of China scrapped a key foreign exchange risk ratio for some forward contracts – a move that allows for cheaper dollar buying in the country.
This came following a strong rally by the yuan against the dollar in recent months, driven in part by exporters dumping the greenback on a strong trade surplus with the United States.
AUD/USD climbed 0.2% to 0.7120, with the Aussie dollar set to rise over 2% this month, aided chiefly by an increasingly hawkish outlook for the Reserve Bank.
Source : investing.com