Dollar steadies as Middle East tensions support weekly gains; rupee outperforms

Dollar holds firm on geopolitical risk and inflation concerns

The dollar index and dollar index futures were little changed on Friday, yet both were poised for gains over the week. Heightened tensions in the Middle East, particularly around Iran, increased safe-haven flows into the greenback and reinforced concerns about energy-driven inflation in the coming months.

Market participants grew more cautious as negotiations over a peace deal appeared to have collapsed, with Iran-backed, Lebanon-based militant group Hezbollah rejecting a ceasefire with Israel. Tehran has called for a Lebanon ceasefire before any major peace agreement with the United States can be reached. These developments added to expectations that persistent inflationary pressures could encourage the Federal Reserve to maintain a hawkish stance.

Attention was focused on U.S. nonfarm payrolls for May, due later on Friday. Payroll growth is expected to have slowed from the prior month, though the data have surprised to the upside in four of the past six months. Inflation and labor market conditions remain the Federal Reserve’s key considerations for future interest rate decisions.

The euro and the pound were both flat in morning trade, reflecting broader caution across major currencies ahead of the U.S. jobs release and amid uncertainty related to Iran.

Rupee strengthens after RBI decision as other Asian currencies stay muted

The Indian rupee stood out as a strong performer on Friday. The USD/INR pair fell nearly 0.7%, extending the rupee’s pullback from recent record lows. The move followed the Reserve Bank of India’s decision to keep interest rates unchanged while trimming its economic growth outlook and raising its inflation forecast for the year, a combination that could signal scope for future rate hikes.

RBI Governor Sanjay Malhotra said the Indian economy remained on strong footing and cautioned against overspeculation against the rupee, emphasizing that India holds sufficient foreign exchange reserves to defend its currency. The RBI has been seen intervening several times in currency markets after the rupee hit a series of record lows in May amid pressure from high oil prices.

Elsewhere in Asia, broader currencies traded narrowly. The Japanese yen’s USD/JPY pair hovered just below 160, with traders attentive to continued warnings on potential foreign exchange intervention from Japanese government officials. The Australian dollar’s AUD/USD pair slipped 0.3%, while the Chinese yuan’s USD/CNY remained flat.

FAQ

Why is the dollar set for weekly gains?
The dollar is set for weekly gains because rising Middle East tensions have driven safe-haven flows into the greenback and increased expectations of higher, energy-driven inflation, which could keep U.S. interest rates elevated.

What is the market focus regarding U.S. economic data?
Markets are focused on the U.S. nonfarm payrolls report for May, which is expected to show slower job growth than the previous month but has frequently surprised to the upside in recent months.

Why did the Indian rupee strengthen on Friday?
The rupee strengthened after the Reserve Bank of India kept interest rates unchanged, raised its inflation outlook, and signaled confidence in the economy, while also indicating it has sufficient foreign exchange reserves and has intervened to support the currency.

How did other major currencies perform?
The euro and the pound were flat, the Japanese yen traded just below 160 per dollar, the Australian dollar fell 0.3% against the U.S. dollar, and the Chinese yuan was little changed.