The dollar index (DXY00) rose to a 1-week high on Friday and finished up by +0.27%. The dollar moved higher on Friday as the risk of a protracted Iran war boosts safe-haven demand for the dollar. Also, Friday’s +5% rally in crude oil prices is pushing inflation expectations higher, potentially forcing the Fed to keep monetary policy restrictive, a bullish factor for the dollar. Friday’s stock slump also boosted liquidity demand for the dollar.
The dollar found support on Friday as Iran and Israel exchanged missile fire, and Iran targeted several Gulf states as the war entered its 27th day. Saudi Arabia said it intercepted two ballistic missiles headed for Riyadh, and Kuwait said drones damaged the port of Shuwaikh, while another port called Mubarek Al Kabeer was also targeted. Meanwhile, the Wall Street Journal reported the Pentagon is considering sending as many as 10,000 additional troops to the Middle East, on top of 5,000 already sent.
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The University of Michigan US Mar consumer sentiment index was revised lower to 53.3 from the previously reported 55.5, weaker than expectations of 54.0.
The University of Michigan US Mar 1-year inflation expectations were revised upward to 3.8% from 3.4%, stronger than expectations of 3.6%. The Mar 5-10 year inflation expectations were unrevised at 3.2%, lower than expectations of an increase to 3.5%.
Swaps markets are discounting the odds at 4% for a +25 bp rate hike at the April 28-29 FOMC meeting.
The dollar continues to be undercut by a poor outlook for interest rate differentials, with the FOMC expected to cut interest rates by at least -25 bp in 2026, while the BOJ and ECB are expected to raise rates by at least +25 bp in 2026.
EUR/USD (^EURUSD) on Friday fell by -0.12%. The euro fell on Friday due to strength in the dollar. Also, ECB Feb inflation expectations unexpectedly eased, a dovish factor for ECB policy that is negative for the euro. In addition, Friday’s +5% rally in crude oil prices is negative for the euro and the Eurozone economy, as Europe imports most of its energy. Finally, the odds of an ECB rate hike next month slipped, weighing on the euro, after ECB Executive Board member Isabel Schnabel said the ECB shouldn’t rush its response to the Iran war.
Losses in the euro were limited on Friday due to hawkish comments from ECB Governing Council member Pierre Wunsch, who said he can’t rule out an ECB rate increase in April.
ECB Feb 1-year CPI expectations unexpectedly eased to a 16-month low of 2.5% from 2.6% in Jan, weaker than expectations of an increase to 2.8%. ECB Feb 3-year CPI expectations unexpectedly eased to 2.5% from 2.6% in Jan, weaker than expectations of an increase to 2.7%.
ECB Governing Council member Pierre Wunsch said, “an ECB rate hike in April is not out of the question” if there is solid evidence that the Iran war will be lasting and lead to higher inflation.