Dollar Climbs as Middle East Conflict Fuels Safe-Haven Demand

The dollar index climbed 0.5% to 99.257, marking a nearly 1.5% gain for the week, its best since November 2024. This strength came at the expense of other major currencies, with the euro falling 0.4% to $1.1579 and sterling dropping 0.3% to $1.3329.

Despite a prevailing "de-dollarization" narrative, the greenback proved its traditional role as a store of value during heightened volatility. The geopolitical turmoil also reignited inflation concerns, leading to an unusual sell-off in both German Bunds and U.S. Treasuries, pushing benchmark yields to 2.829% and 4.138% respectively.

Investors largely overlooked stable U.S. labor market data, which showed initial jobless claims unchanged at 213,000. The renewed inflation fears have prompted traders to push back Federal Reserve rate cut expectations to September or October, reducing the anticipated magnitude of cuts to just 40 basis points this year.

Similarly, rate-easing bets for the Bank of England were pared, while the European Central Bank saw increased bets on rate hikes. Energy prices spiked, further fueling inflation worries, with experts noting the U.S. rate outlook is particularly vulnerable to global inflation shocks.