The dollar remained steady on Friday and looked set to post a weekly gain as renewed friction in the Middle East bolstered investor expectations for higher inflation and interest rates in coming months. Market participants shifted focus to the imminent U.S. nonfarm payrolls report for May, seeking fresh signals about economic momentum and the likely trajectory for policy.
Across foreign exchange markets trading was subdued ahead of the payrolls reading, with geopolitics in the region also adding to caution after talks surrounding a potential peace settlement appeared to have broken down during the week. Iran-linked developments were front and center as a source of risk that could affect energy prices and inflation expectations.
Hezbollah, an Iran-backed group based in Lebanon, rejected a ceasefire proposal with Israel, a move that complicates prospects for U.S.-led negotiations. Iran has said it wants a Lebanon ceasefire as a precondition to any major agreement with the United States, adding another layer of diplomatic difficulty to talks.
In morning trading the euro and the pound were essentially unchanged, reflecting a wider reluctance to take directional bets before the U.S. jobs data. The dollar index and related futures saw little movement on the day but were positioned to finish the week with gains as flows into the greenback increased amid the geopolitically driven risk-off tone.
Heightened fears of a prolonged conflict in the Middle East pushed market expectations toward more energy-related inflation in the months ahead. That scenario is widely seen as likely to keep the Federal Reserve in a more hawkish posture, a dynamic that underpinned the dollar and put pressure on many other currencies.
All eyes are on the May nonfarm payrolls print, due later on Friday, which traders intend to use for a clearer read on the labor market and inflation trends that together shape the Fed's decisions on interest rates. The payrolls figure is particularly significant because the labor market and inflation are the central criteria the Fed weighs when assessing policy adjustments. Forecasts pointed to a slowing in payroll growth for May compared with the previous month, and the payrolls number has surprised to the upside in four of the past six months.
Emerging market currency moves provided prominent intraday action. The Indian rupee stood out as a strong performer, with the USD/INR pair falling almost 0.7% and pulling back from recent record highs. The rupee's gain followed the Reserve Bank of India's decision to hold interest rates steady while trimming its economic growth outlook and raising its inflation forecast for the year. Those revisions could signal the potential for future policy tightening.
RBI Governor Sanjay Malhotra said the Indian economy remained on solid footing and warned against excessive speculative attacks on the rupee, noting that the country has adequate foreign exchange reserves to support the currency. Market observers also noted that the RBI had intervened in currency markets several times to defend the rupee after it fell to a series of record lows in May under pressure from elevated oil prices.
Elsewhere, broader currency trading stayed within narrow ranges amid caution over both developments in Iran and the impending U.S. payrolls print. The Japanese yen hovered with USD/JPY trading just below the 160 level as officials continued to signal the possibility of intervention in foreign exchange markets. The Australian dollar slipped about 0.3% against the dollar, while USD/CNY was effectively unchanged.
Market takeaway - The dollar's resilience this week was driven by geopolitical risk that could lift inflation and thereby support a hawkish Fed stance. The May payrolls report is expected to be a key determinant of market direction in the near term. Currency markets reacted to central bank actions in India, and officials' comments and interventions remain an influence on emerging market FX moves.