Safe-haven demand amid Middle East geopolitical turmoil and growing divergence in monetary policy between the Federal Reserve and other major central banks lifted the U.S. dollar to its highest level since November on Friday.
The dollar index was approaching its highest weekly percentage rise since September 2022. The last gain was 0.7% at 106.02. Iran or its proxies threatened to attack Israel on Friday in reprisal for the killing of a senior commander in Iran's Damascus embassy last week.
Ayatollah Ali Khamenei, Iran's top leader, said Israel "must be punished and shall be" for the assassination, which he called an attack on Iranian soil. "Geopolitical risk rising, hawkish U.S. inflation data, and last week's strong employment report are boosting the dollar," said Jefferies global head of FX Brad Bechtel in New York.
After the European Central Bank signaled a rate cut, the euro fell to a five-month low against the dollar. In contrast, the Fed is expected to keep rates higher until later in the year.
Europe's single currency fell 0.9% to $1.0637 from $1.0622, its weakest since Nov. 3 and on track for its largest weekly percentage drop since late September 2022.
The dollar's wide surge led the yen to a 34-year low as investors looked for signs of Japanese monetary officials supporting the currency. Recent U.S. job market and inflation data have lowered Fed rate cut forecasts again.
Wall Street's main indexes fell on Friday, following a week of higher-than-expected inflation and jobs data that shifted investors' interest rate decrease expectations.
According to CME's FedWatch Tool, opens new tab, June expectations for a 25-basis-point cut have dropped to 26% from 50.8% one week earlier. U.S. rate futures put the first rate decrease in September at 77%.
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