The dollar is on course for a second straight weekly gain as the Iran conflict fuels demand for safe-haven assets.

The U.S. dollar strengthened on Friday and remained on course for a solid two-week winning streak, supported by its status as a preferred safe-haven asset amid the ongoing conflict involving Iran.

By 15:46 ET (19:46 GMT), the U.S. Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.7% to 100.36 and was set for a weekly gain of around 1.4%. Meanwhile, EUR/USD fell 0.8% to 1.1423 and GBP/USD dropped 0.9% to 1.3228. USD/JPY edged 0.2% higher to 159.65.

Analysts at ING noted that the dollar has climbed to fresh monthly highs as markets struggle to see a clear resolution to the escalating Middle East crisis.

The joint U.S.–Israeli military campaign against Iran has now lasted more than a week and shows little sign of easing. President Donald Trump stated that Washington is “totally destroying” Iran’s military and economic capacity.

However, Tehran has signaled it will continue resisting. Iran’s new Supreme Leader, Mojtaba Khamenei, emphasized that the strategic Strait of Hormuz — a crucial shipping lane responsible for roughly one-fifth of global oil supply — will remain closed.

The possibility of a prolonged shutdown of the strait has triggered significant volatility in global oil markets. Brent crude prices surged to nearly $120 per barrel earlier in the week before briefly dropping below $90. On Friday, Brent futures were trading above $100 per barrel.

Because much of the oil and gas transported through the Strait of Hormuz is used to produce key goods such as fertilizers and plastics, rising energy prices could intensify inflationary pressures worldwide.

These inflation risks could lead central banks, including the Federal Reserve, to reconsider plans for near-term interest rate cuts. Higher interest rates typically attract foreign capital, which could further strengthen the U.S. dollar.

PCE inflation data in focus

Investors are also closely watching U.S. inflation data due on Friday, when the personal consumption expenditures (PCE) price index for January will be released.

The core PCE index — which excludes volatile categories like food and energy — is expected to rise 3.1% year-on-year, slightly above the 3.0% reading in December. This indicator is closely followed by financial markets because it is one of the Federal Reserve’s preferred gauges when setting monetary policy.

According to ING analysts, the core PCE index has been drifting further away from the Fed’s 2% target since reaching a low of 2.6% last summer.

They suggested that this trend may limit the Fed’s ability to lower interest rates this year and that policymakers will likely address the issue during next Wednesday’s Federal Open Market Committee (FOMC) meeting.

Interestingly, recent PCE data has shown stronger inflation than the Consumer Price Index (CPI) reported by the Labor Department. This difference largely reflects variations in weighting methods, particularly for housing and healthcare costs, as well as differences in coverage and consumer substitution patterns. Lower weighting for cooling shelter costs and higher exposure to rising medical expenses have kept PCE inflation relatively elevated compared with CPI.

In contrast, February’s CPI data released on Wednesday showed relatively moderate inflation of 2.4% year-on-year.

However, these figures mostly reflect a period before the Iran conflict escalated in late February with a wave of U.S. and Israeli airstrikes. Since then, the inflation outlook has become more uncertain.

Major central bank decisions ahead

Next week will be a crucial period for global monetary policy watchers, as several major central banks — including the Federal Reserve, the European Central Bank (ECB), and the Bank of England — are set to announce interest rate decisions.

Investors will pay close attention to how policymakers address the economic implications of the Iran conflict.

According to JPMorgan economist Michael Feroli, markets widely expect the Fed to leave its benchmark interest rate unchanged at a target range of 3.5%–3.75%.

However, the Middle East conflict may complicate the outlook. Feroli said the Fed’s post-meeting statement is likely to mention the crisis as an additional source of uncertainty affecting both employment and inflation objectives.

The ECB is also expected to keep rates unchanged, although policymakers are likely to comment on the severe oil and gas shock Europe is experiencing due to the conflict.

JPMorgan economists Bruce Kasman and Nora Szentivanyi noted that central banks often face difficult policy choices during periods of volatile energy prices. Energy costs frequently fluctuate by around 25% annually, pushing up energy inflation while making it difficult to determine whether changes stem from supply disruptions or shifts in demand.

While oil prices are expected to remain elevated, a prolonged closure of the Strait of Hormuz could drive prices well beyond current market expectations. A sustained rise to $125 per barrel or higher would likely increase inflation while simultaneously weakening economic growth.

They warned that such a scenario could trigger different policy responses from major central banks. The Federal Reserve typically prioritizes mitigating recession risks and could adopt a more dovish stance if oil shocks intensify. In contrast, the ECB has historically been more sensitive to rising inflation and could tighten monetary policy if oil prices climb significantly.

Sources: Anuron Mitra