Dollar Rebounds on Friday But Remains Weakest Major Currency Amid Fading Rate Hike Expectations

The US Dollar staged a broad rebound on Friday as traders locked in profits from Thursday's selloff and reduced bearish bets ahead of a potentially volatile weekend in the Middle East. However, this move did not undo the week's dominant narrative, with the Dollar still seen as the weakest major currency due to fading expectations for a near-term Federal Reserve rate hike.

Oil prices have remained elevated, with Brent crude climbing back above $88 a barrel, indicating that investors continue to assign a meaningful geopolitical premium to prices. Despite some improvement in tanker traffic through the Strait of Hormuz, the actual degree of recovery remains uncertain, and traders are still pricing tight near-term supply.

A renewed escalation involving Iran could deliver a double-positive shock for the Dollar: higher oil prices would revive inflation concerns and rebuild expectations for further Fed tightening, while a deterioration in risk sentiment would simultaneously boost demand for traditional safe-haven assets. This would make the Dollar particularly sensitive to geopolitical headlines over the coming days.

Confirmed Japanese intervention has added another layer of uncertainty to currency markets. The Bank of Japan's decision to keep its policy rate unchanged at 1.00%, with an 8-1 vote, and Governor Kazuo Ueda's cautious hawkish tone have strengthened the Yen's medium-term support.