The U.S. dollar is on track for a second straight week of gains, driven by investors seeking safe-haven assets amid escalating Middle East conflicts.
Persistent and sharp increases in oil prices could have a devastating impact on economies heavily reliant on crude imports, such as Japan and the Eurozone. In contrast, the United States, having been a net exporter of crude oil for nearly a decade, remains relatively insulated.
Economists remain cautious about monetary tightening, as these countries' significant dependence on energy imports could lead to higher energy costs, potentially hampering economic growth. The euro fell to its lowest level since last August, while the yen weakened to a 20-month low, prompting warnings from Japan that it would take action if the currency depreciates further.
The U.S. has authorized the sale of certain Russian petroleum products that were previously banned due to Moscow's "hostile actions" in Ukraine. Meanwhile, Iran has intensified attacks on oil and transportation facilities in the Middle East following a pledge by its new supreme leader, Ayatollah Khamenei, to close the Strait of Hormuz.
Market reaction to these statements has been muted, as they appear to be another attempt to curb rising oil prices, according to comments from analysts regarding recent U.S. government suggestions that the conflict could end quickly.
On both sides of the Atlantic, markets have increased bets on monetary tightening in anticipation that rising oil prices will fuel inflation.
Brent crude futures rose on Friday after the U.S. moved to ease supply concerns. Washington issued 30-day licenses allowing the purchase of Russian crude and oil products stranded at sea. Additionally, the International Energy Agency agreed to release a record 400 million barrels of crude oil.
However, some analysts warn that emergency measures aimed at mitigating oil supply disruptions could send negative signals to the market, suggesting that world leaders see little room for a rapid de-escalation of the situation.
The U.S. dollar index, which measures the currency against a basket of peers, has climbed to its highest level since November 28. This rise is partly due to its safe-haven appeal and the fact that the U.S. is a net energy exporter.
The index increased by 0.51% to 100.22 and is expected to post a weekly gain of 1.4%.
The euro touched a seven-and-a-half-month low, declining 0.62% to $1.1438. Investors are awaiting the European Central Bank's policy meeting on Thursday. Meanwhile, traders are betting that surging oil prices will prompt central banks to raise interest rates this year.
Economists suggest that a prolonged closure of the Strait of Hormuz would be necessary to justify the ECB easing monetary policy to combat inflation.
Nonetheless, Citibank notes that the possibility of several "insurance" rate hikes cannot be ruled out, and the central bank may leave the door open for such moves next week. The bank's main argument is that the ECB should refrain from acting due to prevailing uncertainties.
The U.S. dollar rose against the Swiss franc to 0.7894, its highest level since January.
The yen approached levels that could trigger intervention, weakening to 159.69 per dollar, its lowest since July 2024.
Japan's Finance Minister, Ms. Mayumi Katayama, stated that Japan is prepared to act if yen volatility begins to affect the daily lives of its citizens. She also mentioned maintaining ongoing communication with U.S. authorities regarding foreign exchange matters.
The U.S. has conducted so-called rate checks, a step that often precedes intervention. Such moves have previously spurred a rebound in the yen. Analysts suggest that recent official reluctance to support the yen could push the exchange rate toward 165 yen per dollar.
Chris Turner, Head of FX Strategy at ING, who also supports Japanese intervention, commented, "A third option—full coordinated intervention with the Fed—could be more sustainable, as it leverages the idea that Washington is prepared to address recent dollar strength."
He added, "The challenge for authorities in Tokyo, Washington, and London is that the USD/JPY rate cannot sustainably decline until energy prices retreat."
The Australian dollar fell 0.70% to $0.7027.
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