US dollar advances as Middle East conflict rages on, fuels safe-haven demand

The U.S. dollar regained its footing on Thursday, rebounding after a brief pullback from three-month highs, as an escalating conflict in the Middle East kept investors jittery and drove demand for safe-haven assets.

Earlier hopes of a de-escalation gave way to a fresh bout of uncertainty, with Iran warning that Washington would "bitterly regret" the sinking of an Iranian warship off Sri Lanka. 

The conflict entered its sixth day with more intensive bombing, while Iran vowed to retaliate anywhere for a U.S. attack on a ship thousands of miles from the battle zone.

That kept the dollar in favor, leaving the euro down 0.4% at $1.1580 and sterling 0.3% lower at $1.3326 in afternoon trading.

The dollar index, which measures the greenback against a basket of six other currencies, was last up 0.5% at 99.26.

"De-dollarization has been a huge narrative last year and maybe even part of the year before that. Everyone was looking somewhere else. People are asking: Is the U.S. dollar really a store of value?" said Elisabeth Colleran, co-head of the emerging markets debt team at Loomis Sayles in Boston.

"But this week we see when we have heightened volatility and heightened risk, the dollar certainly rallies, and all currencies, euro included, are pushed down."

As the turmoil triggered a flight to safety, renewed inflation worries muddied the outlook, leaving some traditional havens behaving unpredictably and forcing investors to reassess which assets truly offer protection.

Investors sold both German Bunds and Treasuries, with benchmark yields on those rising to 2.829% and 4.138%, respectively.

With the war in focus, currency investors shrugged off Thursday’s economic data. 

The number of Americans filing new applications for unemployment benefits was unchanged last week, while layoffs dropped sharply in February, consistent with stable labor market conditions.

Initial claims for state unemployment benefits were flat at a seasonally adjusted 213,000 for the week ended February 28, data showed. Economists polled by Reuters had forecast 215,000 claims for the latest week.

The dollar reacted little to the report.

The market is now focused on Friday’s nonfarm payrolls report. A Reuters poll has forecasted new jobs of 59,000 in January, down 130,000 in December, with an unemployment rate of 4.3%, unchanced from the previous month’s level.

NEAR-TERM DOLLAR ADJUSTMENT

TD Securities head of FX strategy Jayati Bharadwaj said she sees room for short‑term adjustment in long dollar positioning given the current risk‑off tone.  But she expects the Iran conflict to remain contained, especially in a U.S. midterm election year.

"(The) U.S. dollar upside should persist only while risk premia remain elevated in crude oil, potentially echoing the price action seen in June 2025 until a regime shift happens in Iran with US backing," Bharadwaj said in a note.

The dollar has risen nearly 1.5% for the week thus far, on track for its best weekly gain since November 2024. It’s one of a handful of winners in a volatile few sessions that have dragged stocks, bonds and, at times, even safe-haven precious metals lower.