Dollar Strengthens to Near Six-Week High Amid Iran Conflict Tensions

Dollar Holds Near Six-Week Highs as Traders Eye Inflation and Energy Disruptions

The dollar held near six-week highs on Friday as traders weighed the prospects of a near-term deal to end the Middle East war and assessed whether the Federal Reserve would raise interest rates if inflation continued to accelerate. The United States has seen some progress towards a deal with Iran, but more work is required, according to Secretary of State Marco Rubio. Iran's foreign ministry spokesman stated that the two sides' differences were deep and significant.

Traders are increasingly concerned that ongoing energy disruptions will filter through to core consumer prices, potentially forcing a tighter monetary policy response. Fed Governor Christopher Waller, an influential voice in policymaking, urged dropping the "easing bias" from the Fed's policy statement, effectively opening the door to a possible rate hike. Waller's statement comes as Fed funds futures traders are pricing in 50% odds of a rate hike by October.

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The University of Michigan's Surveys of Consumers on Friday showed that U.S. consumer sentiment plunged to a record low in May as surging gasoline prices fueled anxiety over worsening affordability, while inflation expectations also rose. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.04% to 99.24.

The yen, on the other hand, weakened 0.1% against the greenback to 159.11 per dollar, making it vulnerable to further action by Japanese authorities. The Bank of Japan is expected to raise borrowing costs only gradually, while other central banks are likely to move far more quickly, putting the yen at a disadvantage with yield-seeking investors. Data on Friday showed Japan's core inflation slowed to a four-year low in April, complicating the outlook for BOJ policy.

In other news, Australia is grappling with jet fuel and diesel shortages that threaten to drag on key industries. Kevin Warsh was also sworn in as Fed leader on Friday. The pound strengthened 0.11% to $1.3444, having shrugged off data earlier that showed retail sales dropped by the most in nearly a year in April, as consumers felt the pinch of the inflationary effects of the Iran war.