US Dollar Forecast: DXY Breakout Watch as War Risks Boost Safe-Haven Flows

Dollar Rises for Second Straight Week as War Escalation and Rate Fears Drive Demand

The U.S. Dollar rose against a basket of major currencies on Friday, finishing higher for a second straight week. The catalyst was the same one that’s been driving markets all week, rising tensions in the Middle East and fading hopes for a Fed rate cut anytime soon.

On Friday, DXY settled at 100.494, up 0.751 or +0.75%.

War Escalation Drives Safe-Haven Buying

The key driver of Friday’s gains was the escalating war between the United States and Iran. Despite positive remarks earlier in the week from President Trump, there were some reports that the U.S. could take stronger military action against Iran. This added to the uncertainty. Due to this development, global investors continued to reduce exposure in riskier assets and moved funds into the dollar.

U.S. Oil Exports Give the Dollar an Edge

Higher oil prices also helped support the greenback. As the war pushed crude higher, traders determined that the U.S. would benefit more from the price rise because the country is a net exporter of crude. Countries that rely heavily on imported energy, like Japan and the Euro Zone, would face economic hardship. The U.S. economy is simply less vulnerable to rising oil costs and that makes the dollar stronger than currencies tied to energy-importing economies.

Strong Economic Data Forces Short-Covering

While most dollar traders were focusing on the impact of the war and higher oil prices, others were watching the latest U.S. economic releases. Friday’s data proved to be supportive for the dollar with consumer spending slightly stronger than expected and inflation remaining persistent. Both factors contributed to the idea that the Federal Reserve may keep interest rates higher for longer. This was supportive for the dollar because at the beginning of the year, traders had priced in 2 or 3 rate cuts. The news forced some of the weaker traders to cover their short positions. The economic data also pushed up Treasury yields, which made the dollar an attractive investment.

Euro and Yen Most Vulnerable

The U.S. Dollar could continue to rise against oil dependent currencies like the Euro and Yen because higher energy costs could slow economic growth in Europe and Japan. However, traders are monitoring the situation closely in Japan because the BOJ could step in to prop up its currency.

Overall, a mix of safe-haven demand, strong U.S. economic data, and expectations of higher interest rates for longer were the factors underpinning the dollar on Friday.

The Technical Picture

Technically, the U.S. Dollar Index (DXY) surged into multi-month highs at 100.395 and 100.540, reaffirming the uptrend and setting up DXY for a possible breakout to the upside on Monday. And there is room to run according to the daily chart with 101.977 the next major target.

Meanwhile, the index remains well-above and well supported by the 200-day moving average at 98.352 and the 50-day moving average at 98.089.

More Information in our Economic Calendar.