Dollar heads for first monthly profit since October

The US dollar edged slightly lower on Friday but remained on track to post monthly gains, supported by escalating geopolitical tensions and a more hawkish tone from the Federal Reserve.

By 03:00 a.m. ET (08:00 GMT), the US dollar index — which measures the greenback against a basket of six major currencies — rose 0.1% to 97.650, heading toward a monthly gain of around 1.4%.

Tensions in the Middle East support the dollar

The dollar benefited from growing concerns that the US military buildup in the Middle East could lead to conflict with Iran, despite ongoing meetings between the two sides to discuss Tehran’s nuclear program.

Mediators from Oman reported that the United States and Iran made progress during talks on Thursday, but several hours of negotiations ended without a clear breakthrough that could prevent potential US strikes.

Analysts at ING said any escalation between Washington and Tehran could have the strongest impact on the dollar at this stage. They added that the probability of a US strike on Iran by the end of March remains relatively high at 55%, according to estimates from the Polymarket platform, preventing markets from betting aggressively on further dollar weakness for now.

The dollar also received additional support from a relatively more hawkish tone at the Federal Reserve, after “several” policymakers at the January meeting signaled openness to raising interest rates again if inflation remains elevated.

US producer price index data for January is due later in the session, alongside scheduled remarks from Fed officials John Williams and Neel Kashkari.

Euro weakens amid European economic softness

In Europe, EUR/USD rose 0.1% to 1.1806, but the single currency is heading for a monthly loss of more than 1%, amid expectations that the European Central Bank will keep interest rates unchanged for several months.

Germany’s unemployment rose slightly in February by 1,000 people to 2.977 million, reflecting the ongoing impact of economic weakness over the past three years on Europe’s largest economy.

In France, consumer prices increased 1.1% year-on-year in February, beating expectations and signaling faster inflation after it had slowed in January to its lowest level in more than five years.

ING analysts said the 1.180 level could remain a pivot point for EUR/USD, as uncertainty related to Iran continues to limit strong directional bets in the market.

Pound slips after election setback

GBP/USD rose 0.1% to 1.3495, but the pound is set to end a three-month winning streak after falling more than 2% in February.

Britain’s Labour Party, led by Prime Minister Keir Starmer, suffered an embarrassing electoral defeat after losing one of its safest seats to the left-wing Green Party.

The development increases pressure on Starmer to demonstrate his leadership credentials after weeks of political turbulence and growing calls for his resignation. ING analysts noted that developments weakening Starmer’s position tend to weigh on the pound, particularly if they raise the probability of a more left-leaning leadership emerging.

Yen heads for monthly loss amid policy uncertainty

In Asia, USD/JPY fell 0.1% to 156.04 but remains on track for a monthly gain of around 0.6%, as the Japanese currency continues to struggle amid questions about the fiscal impact of stimulus plans and tax cuts proposed by Prime Minister Sanae Takaichi.

The ruling coalition’s landslide victory in Japan’s lower house has given Takaichi a clearer path to pass her fiscal agenda.

The yen also faced additional pressure due to rising uncertainty over the timing of the Bank of Japan’s next rate hike, especially after weak Tokyo core CPI data for February showed inflation falling below the central bank’s 2% target for the first time in nearly four years.

Moves in Asian and Australian currencies

USD/CNY rose 0.2% to 6.8552 after the People’s Bank of China removed the foreign-exchange risk reserve requirement on some forward contracts, a move that allows cheaper dollar purchases within the country.

The decision followed a strong rally in the yuan in recent months, partly driven by exporters selling US dollars amid a strong trade surplus with the United States.

Meanwhile, AUD/USD climbed 0.3% to 0.7125, with the Australian dollar heading for gains of more than 2% this month, supported by more hawkish expectations regarding Reserve Bank of Australia policy.