The US dollar held broadly steady on Friday but remained on course for a weekly decline after softer US inflation data prompted traders to scale back expectations of an imminent interest rate hike by the Federal Reserve.

Escalating tensions in the Middle East, however, limited pressure on the US currency by strengthening safe-haven demand.

The confrontation between Iran and the United States intensified throughout the week, undermining the ceasefire reached last month and driving investors toward the dollar as oil prices climbed close to their highest levels in a month.

Euro and sterling head for weekly gains

The euro was little changed at $1.145 and was on track to post a weekly gain of around 0.3%.

Sterling edged lower to $1.346 but remained set for a weekly increase of 0.5%, marking a third consecutive week of gains as concerns over Britain's fiscal position eased.

The Japanese yen strengthened slightly to ¥162.26 per dollar but remained close to the 40-year low of ¥162.84 reached earlier this month.

Traders remained alert to the possibility of intervention in the foreign exchange market after Japanese Finance Minister Satsuki Katayama reiterated that the government was prepared to take decisive action if necessary.

The dollar index, which measures the US currency against a basket of six major currencies, was unchanged at 100.69 but was heading for a weekly decline of around 0.3%.

The index had fallen to a one-month low earlier in the week as expectations of a near-term interest rate hike faded, although safe-haven inflows helped support the dollar.

"There has been no easing in the pace of escalation in the Middle East, and that continues to limit investors' willingness to sell the dollar," said Derek Halpenny, Head of Research for Global Markets EMEA at MUFG.

"US economic data released yesterday also helped curb selling pressure on the US currency," he added.

July rate hike expectations decline

Data released on Thursday showed that US retail sales rose only slightly in June, as lower fuel prices reduced receipts at gasoline stations while online spending recorded a sharp increase.

The figures prompted economists to raise their estimates for US economic growth in the second quarter.

Separate data also indicated that the labor market remained stable, reinforcing expectations that the Federal Reserve would keep interest rates unchanged at its meeting later this month after June consumer inflation showed signs of slowing.

Policymakers, however, remain cautious about relying on a single month of improved inflation data following several months in which price pressures moved in the opposite direction.

According to the CME FedWatch Tool, the probability of an interest rate hike at the July meeting fell to 11%, from 25% a week earlier, while markets priced in a cumulative 26 basis points of rate increases by December.

"I don't think a rate hike will be under consideration at the July meeting," said Tani Fukui, Senior Director of Global Economic and Market Strategy at MetLife Investment Management.

"We expect no interest rate increases or cuts during 2026," he added.

Among other currencies, the Australian dollar remained on track for a third consecutive weekly gain despite falling 0.24% on Friday to $0.6981 as risk appetite weakened and global equities declined.

The Chinese yuan, meanwhile, pulled back from a one-month high against the dollar but remained on course for a third consecutive weekly gain.

The euro fell against a basket of major currencies during European trading on Friday, extending losses against the US dollar for a second consecutive session as demand for the US currency strengthened as a safe haven amid growing concerns over a renewed escalation in the Iran conflict.

The latest weakness came as military exchanges between the United States and Iran continued for a sixth consecutive day.

Inflationary pressures have also returned to the forefront for European Central Bank policymakers following the sharp rise in global oil prices this week, increasing the risk that inflation across the eurozone could begin accelerating again.

This has reinforced market expectations that the European Central Bank will continue tightening monetary policy, with the likelihood of an interest rate hike at its September meeting rising further.

The Price

• The euro fell around 0.1% against the dollar to $1.1435, from an opening level of $1.1442, after reaching an intraday high of $1.1448.

• The euro ended Thursday down 0.15% against the dollar, marking its first loss in three sessions as investors took profits following a rise to a four-week high of $1.1483.

US dollar

The dollar index rose 0.1% on Friday, extending gains for a second consecutive session and reflecting continued strength in the US currency against a basket of major and minor currencies.

Investors continued to buy the dollar as a safe-haven asset as military exchanges between the United States and Iran intensified, while declining shipping traffic through the Strait of Hormuz increased concerns over potential disruptions to global oil supplies.

Global oil prices

Oil prices rose more than 0.5% on Friday, resuming gains after Thursday's temporary pause and moving toward the one-month highs reached on Tuesday as military activity between the United States and Iran intensified around the Strait of Hormuz.

Latest developments in the Iran conflict

• The United States launched a fresh wave of airstrikes against targets inside Iran for a sixth consecutive day.

• Iran's Revolutionary Guard responded with retaliatory ballistic missile and drone attacks targeting military bases hosting US forces across the region.

• Iran warned the United States that the Strait of Hormuz represents a "red line," pledging to respond to any attacks on its infrastructure.

• Reports indicated that Tehran is considering broadening its response, including threatening shipping in the Red Sea if US strikes continue.

• The US fleet, consisting of 20 warships and hundreds of fighter aircraft in the region, continues to intercept vessels traveling to and from Iranian ports.

• Recent developments suggest that the temporary de-escalation agreement reached in June has effectively collapsed, with negotiations halted and large-scale military operations resuming.

European interest rates

• As global oil prices climbed, money-market pricing for a 25-basis-point interest rate hike by the European Central Bank at its July meeting rose above 35%.

• Expectations for a quarter-point increase at the ECB's September meeting climbed above 95%.

• Investors are now awaiting additional eurozone data on inflation, unemployment, and wages to reassess the outlook for monetary policy.

The Japanese yen neared its weakest level in 40 years against the US dollar on Friday, extending losses for a second consecutive session as investors kept a close watch on Japanese authorities for any signs of intervention in the foreign exchange market.

Global oil prices remained close to one-month highs due to supply disruptions through the Strait of Hormuz, renewing concerns over inflationary pressures on the Bank of Japan and strengthening expectations of another Japanese interest rate hike in October.

The Price

• The US dollar rose around 0.1% against the yen to ¥162.47, from an opening level of ¥162.38, after touching an intraday low of ¥162.31.

• The yen closed Thursday down 0.15% against the dollar, marking its first daily loss in three sessions after stronger-than-expected US jobless claims data.

Weekly performance

For the week so far, with trading set to conclude at Friday's settlement, the Japanese yen is down around 0.5% against the US dollar and is on track for a second consecutive weekly loss.

Japanese authorities

The yen has once again come under close scrutiny as it approaches its weakest levels since 1986 against the US dollar, increasing speculation that Japanese authorities could intervene to support the currency and curb excessive weakness.

US dollar

The dollar index rose 0.1% on Friday, extending gains for a second straight session as the US currency strengthened against a basket of major and minor currencies.

Demand for the dollar as a safe-haven asset remained firm as military exchanges between the United States and Iran continued to intensify alongside declining shipping traffic through the Strait of Hormuz, raising concerns over disruptions to global oil supplies.

Latest developments in the Iran conflict

• The United States launched a sixth consecutive day of airstrikes targeting sites inside Iran.

• Iran's Revolutionary Guard responded with retaliatory ballistic missile and drone attacks targeting military bases hosting US forces across the region.

• Iran warned that the Strait of Hormuz remains a "red line," pledging to respond to any attacks on its infrastructure.

• Reports indicated that Tehran is considering broadening its response, including threatening shipping routes in the Red Sea if US strikes continue.

• The US fleet, consisting of 20 warships and hundreds of fighter aircraft in the region, continues to intercept vessels traveling to and from Iranian ports.

• Recent developments suggest that the temporary de-escalation agreement reached in June has effectively collapsed, with negotiations halted and large-scale military operations resuming.

Japanese interest rates

• As global oil prices continue to rise, market pricing for a 25-basis-point rate hike by the Bank of Japan at its July meeting has climbed above 30%.

• Expectations for a quarter-point rate hike at the Bank of Japan's October meeting have increased to above 85%.

• Investors now await additional Japanese inflation, employment, and wage data for further guidance on the outlook for monetary policy.

Oil prices were little changed on Thursday after Iran reportedly instructed Yemen's Houthi movement to prepare for closing a key oil export route through the Red Sea if the United States launches strikes against Iran's energy infrastructure.

Brent crude futures slipped 3 cents to $84.92 a barrel, while US West Texas Intermediate (WTI) crude futures fell 5 cents to $79.55 a barrel.

Fresh Risks to Global Energy Supplies

Wael Makarem, Chief Market Strategist at Exness, said: "Simultaneous disruptions affecting both the Strait of Hormuz and the Bab al-Mandab Strait would significantly increase pressure on global supply chains, reduce the availability of oil tankers, and drive insurance premiums higher."

Three Reuters sources said on Thursday that Iran had instructed the Houthi movement in Yemen to prepare to block oil shipments through the Red Sea if the United States targets Iranian energy infrastructure, creating a new and serious threat to global energy supplies.

A closure of the Bab al-Mandab Strait—the southern gateway to the Red Sea—would open a new front in the energy crisis and the broader confrontation between Iran and the United States. According to Kpler data, about 7.4 million barrels of oil per day passed through the strait in June, equivalent to roughly 7% of global oil production, compared with 4.2 million barrels per day a year earlier.

Escalating Tensions Raise Risks Around the Strait of Hormuz

On Wednesday, the United States struck Iranian coastal defense systems and missile sites after reimposing a naval blockade on Iranian ports. Tehran responded by threatening to halt additional regional energy exports, describing the conflict with the United States as an "existential war."

The latest escalation follows the collapse of a fragile ceasefire reached in June, reviving fears of a broader regional conflict and disrupting energy flows through the Strait of Hormuz, which handled around one-fifth of the world's daily oil and liquefied natural gas trade before the conflict began.

Shipping activity through the strait slowed on Wednesday, the first day after the United States reinstated its naval blockade on Iran, with only seven vessels transiting the waterway compared with 13 the previous day.

Ole Hvalbye, Commodities Analyst at SEB Research, said it would be reasonable for oil prices to continue climbing toward $90–95 per barrel and potentially revisit the $100 level, as repeated disruptions in the Strait of Hormuz continue to create uncertainty over crude exports from the Gulf region.

Oxford Economics said its base-case scenario assumes shipping through the strait will continue at reduced and volatile levels, resulting in intermittent spikes in oil prices that keep average crude prices above $80 per barrel for several quarters.

Separately, Ukraine's Security Service said on Thursday that, in cooperation with the Ukrainian Navy, it had targeted two Russian tankers belonging to the so-called "shadow fleet" using naval drones in the Black Sea.