War Escalation Drives Safe-Haven Buying
The key driver of Friday’s gains was the escalating war between the United States and Iran. Despite positive remarks earlier in the week from President Trump, there were some reports that the U.S. could take stronger military action against Iran. This added to the uncertainty. Due to this development, global investors continued to reduce exposure in riskier assets and moved funds into the dollar.
U.S. Oil Exports Give the Dollar an Edge
Higher oil prices also helped support the greenback. As the war pushed crude higher, traders determined that the U.S. would benefit more from the price rise because the country is a net exporter of crude. Countries that rely heavily on imported energy, like Japan and the Euro Zone, would face economic hardship. The U.S. economy is simply less vulnerable to rising oil costs and that makes the dollar stronger than currencies tied to energy-importing economies.
Strong Economic Data Forces Short-Covering
While most dollar traders were focusing on the impact of the war and higher oil prices, others were watching the latest U.S. economic releases. Friday’s data proved to be supportive for the dollar with consumer spending slightly stronger than expected and inflation remaining persistent. Both factors contributed to the idea that the Federal Reserve may keep interest rates higher for longer. This was supportive for the dollar because at the beginning of the year, traders had priced in 2 or 3 rate cuts. The news forced some of the weaker traders to cover their short positions. The economic data also pushed up Treasury yields, which made the dollar an attractive investment.
Euro and Yen Most Vulnerable
The U.S. Dollar could continue to rise against oil dependent currencies like the Euro and Yen because higher energy costs could slow economic growth in Europe and Japan. However, traders are monitoring the situation closely in Japan because the BOJ could step in to prop up its currency.
Overall, a mix of safe-haven demand, strong U.S. economic data, and expectations of higher interest rates for longer were the factors underpinning the dollar on Friday.
