Dollar Holds Steady as US-Iran Conflict Drives Crude Surge and Treasury Yields Fall
WTI crude prices jumped 4% following US strikes on Iranian assets, while falling Treasury yields and hawkish Federal Reserve commentary kept the greenback flat on Friday.
The US dollar index finished little changed on Friday, caught between competing market forces as a 4% surge in WTI crude oil prices bolstered liquidity demand, while falling Treasury yields weighed on the currency. The greenback found support from a stock selloff and heightened inflation expectations stemming from escalating tensions between the United States and Iran. However, the dollar’s gains were offset by declining bond yields, which reduced the appeal of dollar-denominated assets relative to other currencies.
Geopolitical tensions provided the primary catalyst for the energy market rally. The US launched fresh strikes against Iranian military assets, including coastal surveillance and air defence sites, marking the sixth consecutive day of bombardment. Iran retaliated by attacking US bases in Kuwait, Jordan, and Bahrain, with Kuwait reporting damage to vital desalination and electricity infrastructure. President Donald Trump pledged to intensify operations until Iran ceases attacks on shipping in the Strait of Hormuz, further tightening the global supply outlook.
Domestic economic data presented a mixed picture for the dollar. Housing starts rose 19.0% month-on-month to 1.427 million, significantly beating expectations, while consumer sentiment reached a five-month high of 54.4. Conversely, building permits fell 3.0% to 1.367 million, and manufacturing production remained unchanged, both missing forecasts. Import prices excluding petroleum rose 0.5%, adding to inflationary pressures that influenced central bank policy expectations.
Monetary policy sentiment also played a crucial role in the currency’s performance. Cleveland Fed President Beth Hammack delivered hawkish comments, citing persistently high inflation as her primary concern while noting that consumer spending remains resilient and unemployment stays low. These remarks supported the dollar by reinforcing the possibility of tighter monetary policy. Swaps markets are currently pricing in a 14% probability of a 25 basis point rate hike at the upcoming Federal Open Market Committee meeting on July 28-29.
In related currency markets, the euro fell against the dollar as energy import concerns weighed on the Eurozone economy. The yen weakened on the back of rising crude costs but found some support from safe-haven demand and reports that the Bank of Japan may raise its GDP forecast. Precious metals, including gold and silver, recovered from early losses to close higher, benefiting from the retreat in the dollar and lower global bond yields, despite bearish pressure from rising inflation expectations.
