The US dollar rose on Thursday after a slight overnight decline, as escalating conflict in the Middle East and rising oil prices boosted demand for this global safe haven.
At 12:35 (Saudi Arabia time), the dollar index, which tracks the performance of the US currency against a basket of six other currencies, rose 0.2% to 98.897, after falling by about 0.3% overnight and resuming its climb towards its highest level in more than three months, which it recorded earlier this week.
The dollar resumes its rise
The dollar saw increased demand on Thursday after the U.S. Senate voted, largely along party lines, against a proposal that would halt the air campaign and require military action to be authorized by Congress.
In addition, the United States sank an Iranian warship near Sri Lanka in international waters on Wednesday, raising concerns that hostilities could extend beyond the Persian Gulf.
Meanwhile, the White House said on Wednesday that Mojtaba Khamenei, the son of Iran’s slain Supreme Leader, has emerged as a possible successor, meaning Tehran will not yield to pressure.
Investors may now conclude that a quick resolution in the Middle East is unlikely, as reports suggesting an early negotiated settlement or US efforts to reopen the Strait of Hormuz amid an ongoing conflict appear premature, analysts at ING said in a note.
The Federal Reserve's Beige Book, released Wednesday, indicated that economic activity across the United States was showing signs of weakness in late February.
With that in mind, traders will be watching Challenger's February job cuts data later in the session, especially given the sharp rise in January and with the widely watched monthly non-farm payrolls report due on Friday.
Given the high degree of uncertainty, we believe the dollar could move towards the top of recent ranges today, ING added.
The euro is likely to remain in supply.
In Europe, the EUR/USD pair traded largely flat at 1.1634, hovering near its lowest level since late November as rising energy prices weighed on Europe’s growth outlook.
With growth prospects under pressure, we could see the EUR/USD pair remain offered until this energy crisis is resolved, ING said.
Data released earlier this week showed that inflation in the Eurozone was higher than expected in February, even before the start of the Iranian conflict.
The GBP/USD pair fell 0.1% to 1.3360, as expectations of an interest rate cut from the Bank of England receded amid near-term rising energy costs.
Furthermore, sterling appears vulnerable if bond markets come under renewed pressure, ING said. One scenario is that higher energy prices limit or reverse monetary easing cycles, leading to renewed energy subsidies by populist governments and damaging bond markets. This was the scenario in 2022 that triggered the UK Treasury bond crisis later that year.
China lowers its 2026 growth target
In Asia, the USD/CNY pair rose 0.1% to 6.8985, after Chinese authorities announced an economic growth target for 2026 of between 4.5% and 5%, down from three consecutive years of targets around 5%, and the lowest target since 1991.
The slight easing shows that growth stability remains important, but the firm fiscal targets also indicate a reluctance to rely too heavily on new stimulus measures to boost growth, ING said.
The USD/JPY pair rose 0.1% to 157.22, near its highest level in the last 5 weeks, while the AUD/USD pair fell 0.6% to 0.7030 after economic data from Australia showed the country's trade surplus shrank in January.
