The US dollar is expected to record a monthly gain due to geopolitical tensions and the Federal Reserve's more hawkish stance.

Investing.com - The US dollar edged lower on Friday but is poised to record a monthly gain, supported by escalating geopolitical tensions and a more hawkish tone from the Federal Reserve.

As of 03:00 AM Eastern Time (16:00 Beijing Time), the US Dollar Index, which tracks the dollar against a basket of six major currencies, rose 0.1% to 97.650, with an expected monthly increase of about 1.4%.

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Dollar Supported by Geopolitical Tensions

The dollar is supported by market concerns over the possibility of conflict with Iran due to US military buildup in the Middle East, despite talks between the two sides on Tehran’s nuclear program.

Mediation broker Oman said that US-Iran talks on Thursday made progress, but after hours of negotiations, no breakthrough was reached that could prevent potential US strikes.

ING analysts stated in a report: “We still believe that any escalation in US-Iran tensions has the greatest impact on the dollar at this stage. However, Polymarket shows that the probability of the US launching strikes on Iran before the end of March remains high at 55%, which we believe currently prevents further dollar depreciation.”

The dollar is also supported by a slightly hawkish stance from the Federal Reserve, as policymakers indicated in January that they are willing to raise interest rates if inflation remains high.

The US January PPI report will be released later today, with Fed officials John Williams and Neel Kashkari also scheduled to speak.

ING added: “Short-term drivers still clearly point to a stronger dollar, but new tariff uncertainties add reasons to maintain a dollar risk premium. Unless there is significant geopolitical news, we expect the dollar to remain stable today.”

Euro Slightly Declines

In Europe, EUR/USD rose 0.1% to 1.1806, as markets expect the European Central Bank to keep interest rates steady in the coming months, leading to a slight monthly decline of over 1% for the single currency.

Germany’s February unemployment rose slightly by 1,000 to 2.977 million, with ongoing economic softness over the past three years continuing to pressure the largest European economy’s labor market.

French consumer prices rose more than expected in February, up 1.1% year-on-year, showing signs of acceleration after slowing to the lowest level in over five years in January.

ING added: “We believe that, given the significant uncertainty surrounding Iran, 1.180 can continue to serve as an anchor point for EUR/USD in an environment where strong directional views are hindered.”

GBP/USD rose 0.1% to 1.3495 but is expected to end a three-month winning streak, with February’s decline exceeding 2%.

Prime Minister Rishi Sunak’s Labour Party suffered an embarrassing defeat in Friday’s elections, losing one of its safest seats to the left-wing Green Party.

This puts greater pressure on Sunak to prove he deserves to stay in office, amid weeks of political turmoil and calls for his resignation.

ING noted: “Any recent events perceived as weakening Prime Minister Rishi Sunak’s position have hurt the pound, and the success of the more left-wing Green Party in this special election could increase the likelihood of a more left-leaning successor after Sunak’s potential early departure.”

Yen Likely to Record Monthly Decline

In Asia, USD/JPY fell 0.1% to 156.04, but the pair is expected to rise 0.6% in February, as the yen weakens amid market doubts about Prime Minister Fumio Kishida’s stimulus and tax cut plans’ impact on fiscal health.

Following Kishida’s ruling coalition winning an outright majority in Japan’s House of Representatives, his fiscal plans are seen as having a clear path to implementation.

The yen’s weakness is also driven by increasing market doubts about when the Bank of Japan will raise interest rates again—weak February consumer price index inflation data in Tokyo further deepened these doubts.

This data, often seen as a barometer of nationwide inflation, showed core CPI falling below the Bank of Japan’s 2% annual target for the first time in nearly four years—potentially limiting the central bank’s plans for further rate hikes.

USD/CNY rose 0.2% to 6.8552 after the People’s Bank of China removed the reserve requirement ratio for some forward foreign exchange contracts—making it cheaper to buy dollars in China.

In recent months, the yuan has appreciated significantly against the dollar, partly due to exporters selling dollars amid strong US trade surpluses.

AUD/USD rose 0.3% to 0.7125, with the Australian dollar expected to rise over 2% this month, mainly supported by market expectations of a more hawkish outlook from the Reserve Bank of Australia.

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