Dollar Holds Steady as Soaring Crude Offsets Falling Treasury Yields
The US dollar finished flat on Friday as rising oil prices and hawkish Federal Reserve signals balanced the downward pressure from declining Treasury yields.
The US dollar index finished little changed on Friday, caught between competing macroeconomic forces. A 4 percent jump in West Texas Intermediate crude prices provided underlying support for the currency by raising inflation expectations. However, these gains were ultimately erased as Treasury note yields declined, narrowing the dollar’s interest rate differentials.
Escalating tensions in the Middle East are the primary catalyst behind the surge in energy markets. The United States launched fresh strikes against Iran for the sixth consecutive day on Friday, targeting coastal surveillance, air defense sites, military logistics infrastructure, and maritime assets. In response, Iran attacked US bases in Kuwait, Jordan, and Bahrain.
The retaliatory strikes caused tangible infrastructure damage, with Kuwait reporting hits to a desalination and electricity plant. Kuwaiti armed forces also intercepted 32 Iranian drones targeting vital institutions. President Trump has pledged to intensify the bombardment until Iran ceases attacks on ships in the Strait of Hormuz and agrees to open the waterway, keeping a risk premium embedded in oil prices.
This geopolitical risk supports a hawkish Federal Reserve outlook, which in turn underpins the dollar. Cleveland Fed President Beth Hammack reinforced this view on Friday, stating that persistently high inflation remains her primary concern while consumer spending holds up and unemployment stays low. Additionally, a broader stock market selloff boosted liquidity demand for the greenback.
Underlying US economic data presented a mixed picture for currency traders. June housing starts surged 19.0 percent month-over-month to 1.427 million, beating expectations of 1.310 million. Conversely, June building permits, a key proxy for future construction, fell 3.0 percent to 1.367 million, missing the 1.403 million forecast.
Manufacturing production in June was unchanged month-over-month, falling short of the anticipated 0.1 percent gain. On the inflation front, the June import price index excluding petroleum rose 0.5 percent month-over-month, slightly above the 0.4 percent expectation.
Consumer confidence offered a bright spot, with the University of Michigan’s July consumer sentiment index rising 4.9 points to a five-month high of 54.4, surpassing forecasts of 51.0. Meanwhile, short-term inflation expectations moderated, with the one-year outlook easing to 4.2 percent from 4.6 percent in June, while five-to-ten-year expectations held steady at 3.3 percent.
