President Donald Trump said the U.S. was going to be hitting Iran “very hard over the next week”, shortly after issuing a partial 30-day waiver for purchases of sanctioned Russian oil, hoping to ease prices fuelled by the U.S.-Israeli war on Iran. A sharp and prolonged rise in oil prices would severely hurt the economies of Japan and the euro zone, which are heavily reliant on crude imports, while the United States would be relatively insulated, having been a net crude exporter for almost a decade.
“Global investors are unwinding cross-border exposures, pushing money into safe havens, and punishing currencies issued by net energy importers,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
The euro was 0.6% lower against the dollar at $1.14395. The dollar index, which measures the greenback’s strength against a basket of currencies, was up 0.7% at 100.35. The index is up 1.5% for the week.
Schamotta, however, warned that FX markets face two-way risks.
“As the war drags on, both Tehran and Washington have strong motivations for returning to the negotiating table and there are good reasons to suspect they could strike a face-saving bargain as soon as this weekend,” said Schamotta.
INFLATION WATCH
Data on Friday showed U.S. consumer spending increased slightly more than expected in January, which together with continued strength in underlying inflation and the dragging war in the Middle East, bolstered economists’ views that the Federal Reserve would not resume cutting interest rates for some time.
“The latest personal consumption expenditures inflation data tells us that the inflation picture wasn’t looking good even before the Middle East crisis,” Sonu Varghese, global macro strategist at Carson Group, said in a note.
“An already large headache for the Federal Reserve is going to turn into an even larger one, and it’s likely the Fed will not cut rates in 2026 and may even start talking about rate hikes later this year,” Varghese said.
EURO PAIN Investors await the European Central Bank policy meeting next Thursday, while traders bet that surging oil prices could push the central bank to hike rates this year.
Still, economists remain wary of monetary tightening in economies where dependence on fuel imports means surging energy costs are likely to weigh on growth.
“It has become very clear that shipping through the Strait of Hormuz could be affected for a while,” Jane Foley, head of FX strategy at Rabobank, said in a note.
“We have therefore reduced our EUR/USD forecasts on a 1- and 3-month view to 1.14 and 1.15 respectively from 1.16,” she said.
YEN IN INTERVENTION TERRITORY
Against the Japanese yen, the dollar rose to its strongest level since July 2024 and was last trading up 0.2% at 159.67 yen.
Japan is ready to take the necessary steps against yen moves that impact people’s lives, Finance Minister Satsuki Katayama said on Friday, adding that she was in close contact with U.S. authorities on foreign exchange issues.
“Policymakers are likely to take a dim view of the effect that exchange rate weakness will have on already-soaring import bills,” Schamotta said, noting that pressure to intervene to prop up the battered yen could increase in coming days and weeks.
Leading cryptocurrency bitcoin was 1.2% higher at $71,021, after rising to a nine-day high earlier in the session.
