Dollar climbs as Iran crisis roils markets

The US dollar was on track for one of its strongest weeks in more than a year as investors sought safety amid an escalating conflict in the Middle East. The dollar index (DXY) hovered around 99 on Friday and was poised for a weekly gain of about 1% to 1.4%, which would mark its steepest advance since November 2024.

In early Asian trade, the greenback traded broadly steady, with the euro little changed near $1.1612 and the yen around 157.5 per dollar. Sterling was also almost flat at about $1.3361. The dollar’s strength contrasted with weakness across other asset classes, as volatile sessions dragged down stocks, bonds and, at times, even traditional havens such as precious metals.

The US-Israeli offensive against Iran entered its seventh day with no signs of abating, driving safe-haven flows and pushing oil prices higher. Tehran launched fresh waves of missile and drone strikes across the Gulf, while Gulf cities came under renewed bombardment following US and Israeli air strikes on areas across Iran.

The conflict intensified after US and Israeli strikes killed Iran’s Supreme Leader Ali Khamenei in the early moments of the war. Iran later warned that Washington would "bitterly regret" the sinking of an Iranian warship. Iranian Foreign Minister Abbas Araghchi denied reports that Tehran was seeking a ceasefire and indicated no intention to negotiate.

In a phone interview with Reuters, US President Donald Trump said he wanted a role in choosing Iran’s next head of state and dismissed Mojtaba Khamenei, son of the late supreme leader, as an unlikely successor. Trump also stated he wanted to be involved in selecting Iran’s next leader, while markets focused on the broader economic fallout from the conflict.

Rising oil prices have amplified concerns about a resurgence of inflation globally, particularly in economies heavily dependent on energy imports. Those worries unsettled financial markets and contributed to a re-pricing of interest rate expectations for the Federal Reserve and other major central banks.

Traders have scaled back expectations for near-term US rate cuts, pushing back the anticipated timing of the next Fed easing move from July to either September or October, according to both Trading Economics and LSEG estimates. Overnight index swaps showed similar shifts in rate outlooks across major economies.

Market participants also reduced expectations for Bank of England rate cuts, while money markets increased bets that the European Central Bank could raise rates as early as this year. Analysts cited memories of inflation spikes following the Russia-Ukraine war and post-pandemic supply shocks as a key factor behind the rapid repricing in OIS curves and bond markets.

US Treasury yields climbed alongside the stronger dollar. The yield on the 10-year US Treasury note held around 4.14% on Friday after four consecutive sessions of gains, buoyed by both inflation concerns and signs of solid US economic momentum.

Recent US data showed lower jobless claims, stronger productivity, fewer announced job cuts and faster-than-expected growth in the services sector. These indicators reinforced the view that the economy remains resilient, further reducing pressure on the Fed to cut rates quickly even as geopolitical risks mount.

With the 10-year yield advancing and rate-cut bets pushed out, the dollar gained most this week against the euro, reflecting Europe’s heavy reliance on Middle East oil and the heightened inflation risks facing major oil-importing economies.