NEW YORK: The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the US Federal Reserve given the likelihood of higher inflation from rising energy prices.
Before the US-Israeli war on Iran began in late February, investors had priced in two Fed cuts this year. But they now largely believe one cut is a distant prospect, and other major central banks are turning more hawkish.
The euro, yen, sterling and Swiss franc headed for weekly gains against the dollar as policymakers laid the groundwork for higher interest rates in response to the war in the Middle East, which has choked oil and gas supplies.
The euro was down 0.25 percent to USD1.156 but on track to add 1.3 percent this week.
The yen was down 1 percent against the greenback to 159.30 per dollar. It is set to gain 0.24 percent this week.
Sterling weakened 0.72 percent to USD1.333 but was set to gain nearly 0.84 percent against the dollar for the week.
Benchmark Brent crude futures are up about 50 percent since the US and Israel attacked Iran, which has all but closed the Strait of Hormuz and disrupted Middle East energy exports. Brent futures for May delivery settled on Friday up 3.26 percent to USD112.19 a barrel, the highest since July 2022.
The dollar index was up about 0.26 percent at 99.59, but on track for a 0.94 percent weekly decline, its largest since late January. Still, many analysts think a prolonged fall is unlikely.
“Markets have preempted communication with a notable shift in policy pricing: many G10 central banks now priced for hikes, while the Fed is priced for fewer cuts in 2026. This repricing has mitigated some of the USD’s oil-induced rally,” said Bank of America Global Research analysts led by Adarsh Sinha.
The European Central Bank kept rates on hold on Thursday, but warned of inflation driven by energy prices.
The Bank of England also kept rates on hold, but set off a sharp rout in short-dated gilts by saying it was ready to act.
The Bank of Japan left the door open to a hike as soon as April, wrong-footing investors who had bet on a further slide in the yen and helping to lift the currency.
The Australian dollar weakened 0.99 percent versus the greenback to USD0.702 for a weekly gain of 0.53 percent, after the Reserve Bank of Australia hiked interest rates for the second time in as many months on Tuesday and investors expected more to come.
The Fed left rates on hold as expected earlier this week, but Chair Jerome Powell said it was too soon to know the scope and duration of the economic impact from the war.
The Swiss franc was flat at 0.788 against the dollar but headed for a weekly gain of 0.43 percent.
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