Dollar on track for second weekly profit as euro, yen plumb multi-month lows

The US dollar is heading toward its second consecutive weekly gain on Friday as investors turn to safe-haven assets amid the escalating war in the Middle East, while energy-sensitive currencies such as the euro and the yen fell to their lowest levels in several months.

The sharp and prolonged rise in oil prices is expected to significantly affect the economies of Japan and the eurozone, both of which rely heavily on crude oil imports, while the United States remains relatively less affected as it has been a net exporter of oil for nearly a decade.

At the same time, economists are expressing caution about tightening monetary policy in those economies, as their heavy dependence on fuel imports means that rising energy costs could weigh on economic growth.

The euro fell to its weakest level since August, while Japan warned that it is ready to take action to protect its currency after the yen dropped to a 20-month low.

As oil prices rise, the United States has allowed the sale of some Russian oil products that had been under sanctions due to the war in Ukraine. Meanwhile, Iran has intensified attacks on oil and transportation facilities across the Middle East, while the new Supreme Leader Ayatollah Mojtaba Khamenei pledged to keep the shipping route through the Strait of Hormuz closed.

Volkmar Baur, currency strategist at Commerzbank, said that recent statements by the US administration about the possibility of a quick end to the war now appear closer to attempts to push oil prices lower again, adding that markets are responding to such signals less and less.

Markets have also increased bets on tighter monetary policy on both sides of the Atlantic, with higher oil prices expected to intensify inflationary pressures.

Brent crude futures rose on Friday as the United States sought to calm supply concerns by issuing a 30-day license allowing countries to purchase Russian oil and oil products stranded at sea. Earlier this week, the International Energy Agency approved the release of a record 400 million barrels from strategic reserves.

However, some analysts believe that emergency measures to address supply disruptions could send a subtle negative signal to markets, suggesting that global leaders see little room for a quick de-escalation.

The dollar index, which measures the performance of the US currency against a basket of major currencies, rose to its highest level since November 28, supported by its safe-haven appeal and by the United States being a net energy exporter. The index rose 0.51% to 100.22 and is heading for a weekly gain of about 1.4%.

Euro at a seven-and-a-half-month low

The euro fell to $1.1438, its lowest level since August, down 0.62%. Investors are awaiting the European Central Bank’s monetary policy meeting next week, while traders are betting that higher oil prices could push the bank to raise interest rates later this year.

Economists believe that a prolonged closure of the Strait of Hormuz would be necessary to justify tightening monetary policy by the European Central Bank to combat inflation.

However, analysts at Citi said that two precautionary interest rate hikes cannot be ruled out, although their base scenario remains that policy will stay unchanged due to the prevailing uncertainty.

The dollar also rose to its highest level since January against the Swiss franc at 0.7894.

Yen approaches intervention zone

The yen fell to 159.69 against the dollar, its weakest level since July 2024. Japanese Finance Minister Satsuki Katayama said the country is ready to take the necessary steps to address currency movements that affect people’s lives, adding that Japan is in close contact with US authorities regarding foreign exchange market issues.

The yen’s weakness toward the 160 level against the dollar in January prompted the United States to conduct what are known as interest rate checks, which often precede market intervention, helping support the Japanese currency at the time. However, some analysts believe that the recent hesitation by officials to verbally support the yen could push it down to 165 against the dollar.

Chris Turner, head of currency strategy at ING, said that potential joint intervention with the US Federal Reserve could be more effective and sustainable, but noted that the main issue is that the dollar/yen pair will not decline sustainably unless energy prices fall.

The Australian dollar also fell 0.70% to $0.7027.