Dollar Hits Three-Month High as Iran War Sustains Inflation Concerns

Dollar Strengthens on Higher-for-Longer Rate Expectations

The ICE US Dollar Index rose to 99.863 on Friday, up 0.12% on the day, putting it on track for a second straight weekly advance. The move reflected market expectations that the Federal Reserve will keep interest rates elevated for an extended period, as oil-driven inflation complicates the timing and scale of potential rate cuts.

The Iran war showed no signs of ending, keeping oil prices elevated and reinforcing inflation fears in global markets. This backdrop reduced the perceived likelihood of near-term monetary easing by major central banks and supported demand for the US currency.

Pressure on Major and Asian Currencies

The Japanese yen fell to a 20-month low against the dollar, with USD/JPY trading at 159.4. Analysis indicated that Japan likely has less scope to intervene in the currency market to support the yen, as the currency’s weakness is now seen as being driven more by global factors than by domestic conditions.

The euro declined to 1.15 against the dollar, while the British pound dropped to 1.332. In Asia, most regional currencies weakened on Friday, with the Indian rupee hitting a record low as markets remained on edge over the Iran war’s impact on oil prices and global inflation.

In the United Kingdom, BofA Global Research delayed its Bank of England rate-cut call to June, citing renewed inflation risks stemming from higher energy prices. Across markets, the dollar’s advance and the broad currency moves reflected the view that sustained energy price pressures will keep inflation elevated and delay rate cuts by major central banks.

FAQ

What level did the ICE US Dollar Index reach on Friday?
The ICE US Dollar Index rose to 99.863, an increase of 0.12% on the day.

How did the Japanese yen trade against the US dollar?
The Japanese yen fell to a 20-month low, with USD/JPY trading at 159.4.

Why is the US dollar gaining while other currencies weaken?
The dollar is strengthening on expectations that the Federal Reserve will keep interest rates higher for longer, as the Iran war keeps oil prices elevated and heightens global inflation concerns, reducing prospects for near-term rate cuts by major central banks.

What change did BofA Global Research make to its Bank of England rate outlook?
BofA Global Research delayed its call for a Bank of England rate cut to June, citing revived inflation risks from higher energy prices.