The US dollar's gains this week are the strongest since October, driven by risk aversion.

Investing.com - The US dollar edged higher on Friday, poised to record its strongest weekly performance since October, supported by more hawkish Federal Reserve outlook and escalating tensions between the US and Iran.

As of 04:00 AM Eastern Time (17:00 Beijing Time), the US Dollar Index, which tracks the dollar against six major currencies, rose 0.1% to 97.920, approaching the one-month high touched on Thursday.

The dollar index is set to gain over 1% this week, its strongest showing in more than four months.

Dollar Slightly Rises Ahead of Key Data Releases

The dollar received demand support this week, benefiting from strong US economic data, the hawkish tone in the latest Federal Reserve meeting minutes, and concerns over potential military conflict in the Middle East.

Overnight, the dollar gained additional momentum after data showed that US initial jobless claims last week fell more than expected, highlighting labor market stability.

Earlier, the Federal Reserve’s latest meeting minutes released on Wednesday revealed disagreements among officials about the policy outlook, reinforcing expectations that US monetary policy will remain relatively tight.

The closely watched inflation indicator—the core PCE index—will be released later today.

Concerns over US-Iran conflict also provided safe-haven support for the dollar, with US President Donald Trump warning this week that Tehran must reach an agreement on its nuclear program, or “very bad things” will happen.

ING analysts stated in a report: “We believe the market needs to see some encouraging diplomatic progress and less hawkish rhetoric on military threats before selling the dollar in the current environment. It may still be too early today, and the dollar remains at risk of rising.”

Euro and Pound Headed Lower This Week

In Europe, EUR/USD declined 0.1% to 1.1761, with the euro expected to fall 0.8% this week, weighed down by uncertainty over European Central Bank President Christine Lagarde’s term.

Additionally, German producer prices in January fell more than expected, down 3% year-over-year, compared to the anticipated 2.1% decline. Investors will also digest the entire eurozone PMI data later today.

ING added: “Disappointing ZEW index this week may have dampened some enthusiasm for today’s survey, but eurozone composite PMI should stay above 50.0 (the expansion/contraction threshold), allowing for some mild optimism. We believe the impact on the euro should be limited.”

GBP/USD fell 0.1% to 1.3451, with the pound hitting a one-month low, expected to decline about 1.5% this week, unable to benefit from January’s strong retail sales growth.

On a monthly basis, UK retail sales increased 1.8% last month, compared to 0.4% in December, and grew 4.5% year-over-year.

ING said: “We expect the Bank of England to cut interest rates at the March meeting. The market is currently pricing in a 20 basis point cut, and we still forecast another cut in June, though market pricing is only 40%. Political risks remain a major concern for the pound.”

Yen Falls After Inflation Data Release

In Asia, USD/JPY rose 0.2% to 155.36, with the yen slightly weaker after data showed Japan’s January consumer price index fell to its lowest in nearly four years.

Overall inflation slowed to 1.5%—the first time below the Bank of Japan’s target in nearly four years—and the core index, excluding fresh food and fuel, also decelerated, though still above target, indicating potential easing of inflation momentum.

Weaker inflation data has heightened market doubts about the timing of the next BOJ rate hike.

Other data released on Friday showed Japan’s factory activity expanded at its fastest pace in over four years.

Additionally, USD/CNY remained flat at 6.9087, with Chinese markets closed this week.

AUD/USD declined 0.1% to 0.7042, with the Australian dollar giving back some of its gains this week after data showed January unemployment held steady at 4.1%, indicating that despite slowing employment growth, the labor market remains tight.

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