Amid escalating Middle East tensions boosting safe-haven demand, the US dollar is on track for its strongest weekly performance in over a year. Investors are now turning their attention to the upcoming US employment report on Friday to assess whether the dollar's rally can be sustained. Data shows the US dollar spot index has climbed approximately 1.4% this week. If these gains hold, it would mark the index's best week since November 2024. Previously, the dollar had weakened overall due to policy uncertainty in Washington and market expectations that the Federal Reserve would cut interest rates this year; this week's rise has partially reversed that trend.
A key factor driving the dollar's strength is the sharp increase in oil prices. Since the US military strike on Iran on February 28, the price of US benchmark West Texas Intermediate crude has surged more than 17%. Rising energy costs have reignited inflation concerns while dampening market expectations for Fed rate cuts, thereby boosting the dollar. Despite this week's notable rebound, the dollar index remains largely flat for the year overall and is still down about 8% compared to its level when the US President took office last year.
Ahead of Friday's non-farm payrolls report, bullish sentiment toward the dollar among traders in the one-week options market has reached its highest level since June 2024. Market participants believe that strong jobs data would further bolster investor confidence in the dollar. A Goldman Sachs strategy team noted that while the market is currently focused on the Middle East situation and energy price movements, the influence of US labor market data on growth and interest rate expectations will remain a crucial factor determining currency performance.
According to a media survey of economists, US non-farm payrolls are forecast to have increased by 55,000 in February, significantly lower than the 130,000 jobs added in January. FX market analysts pointed out that if the data exceeds expectations, it could trigger a new wave of dollar buying as investors reassess the Fed's policy path. Karl Schamotta, Chief Market Strategist at Corpay, stated that robust employment data would reinforce the market's current trend of repricing toward a more hawkish Fed and extend the recent dollar rally. Among major currencies, the Japanese yen, euro, and British pound are most vulnerable to renewed selling pressure.
However, some analysts caution that even weaker-than-expected jobs data may not be sufficient to prompt the Fed to cut rates soon. Jayati Bharadwaj, FX Strategist at TD Securities, suggested that only extremely weak non-farm payrolls data accompanied by a significant rise in the unemployment rate would likely cause the market to reconsider the rate cut outlook for this year, as ongoing Middle East conflicts and inflation risks remain primary concerns.
Simultaneously, the European economic outlook is under pressure from energy risks. Rising energy prices triggered by the Middle East conflict have again highlighted Europe's dependence on Middle Eastern energy supplies, raising market fears of potential "stagflation" risks. This week, the euro has fallen approximately 1.7% against the dollar, last trading around $1.1605. Davide Oneglia, Economist at TS Lombard, noted that if shipping through the Strait of Hormuz is disrupted by the conflict, it would further intensify stagflationary pressures on the European economy, with the impact of reduced energy supply and higher prices potentially lowering European GDP by up to 0.9%.
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