The euro edged lower in European trading on Friday against a basket of global currencies, extending losses for a second consecutive session against the US dollar and hovering near a four-month low. The currency is on track for its largest weekly decline since 2024, weighed down by surging global energy prices triggered by the fallout from the Iran war, which is expected to negatively affect economic activity in Europe.

The crisis is likely to push prices higher and accelerate inflation across the eurozone, placing policymakers at the European Central Bank under growing inflationary pressure.

At the same time, the European economy may require additional monetary support to counter slowing activity, creating a difficult balance between containing inflation and supporting growth.

Price Overview

Euro exchange rate today: the euro declined about 0.1% against the dollar to $1.1603, down from the opening level of $1.1610, after touching a session high of $1.1621.

The euro ended Thursdays trading down 0.2% against the dollar, resuming losses that had paused the previous day during a brief recovery from a four-month low of $1.1530.

Weekly performance

Over the course of this weeks trading, which officially concludes with todays settlement, the euro is down about 1.8% against the US dollar, on track for its second weekly loss in the past three weeks and its largest weekly drop since April 2024.

US Dollar

The dollar index rose more than 0.1% on Friday, maintaining gains for a second consecutive session while trading near its highest level in four months, reflecting the strength of the US currency against a basket of global peers.

The rise comes as investors buy the dollar as a preferred safe-haven asset, with the Iran war entering its seventh day and fears growing of a broader conflict in the Middle East. These concerns have driven energy prices sharply higher and increased downside risks for the global economy.

Strong US economic data and renewed speculation about inflationary pressures on the Federal Reserve have also reduced expectations for US interest rate cuts during the first half of this year.

Investors are awaiting the US February jobs report later today, which the Federal Reserve closely monitors in determining the path of monetary policy.

Global energy prices

Global oil and gas prices surged as a result of the USIsraeli war on Iran, which disrupted energy exports from the Middle East. Iranian attacks on ships and energy facilities led to the closure of shipping routes in the Gulf and halted production from Qatar to Iraq.

Brent crude rose about 18% this week, reaching a 20-month high of $86.22 per barrel, while European gas prices jumped more than 70% since the end of last week.

Views and analysis

Analysts at Wells Fargo said in a note that the euro faces a difficult situation. Europes natural gas storage refill season is about to begin, and the European Union is entering the season with record-low gas levels in storage, meaning it will need to purchase large amounts of energy at a time when prices could rise significantly.

George Saravelos, head of global FX research at Deutsche Bank, said the impact of the Iran war on the euro/dollar pair revolves around one key factor: energy.

Saravelos added that a negative supply shock is currently forming, effectively acting as a direct tax on Europeans that must be paid to foreign producers in US dollars.

Analysts at ING wrote in a research note that the European Central Banks position has suddenly come into question, and they doubt the issue can be resolved in the very near term.

They added that the possibility of the ECB raising interest rates poses a serious risk to interest rate carry trades and could lead to a significant widening in eurozone government bond spreads.

European interest rates

Following higher-than-expected inflation data released this week in Europe, money markets sharply reduced pricing for a 25-basis-point rate cut by the European Central Bank in March from 25% to 5%.

Investors are now awaiting additional economic data from the eurozone on inflation, unemployment, and wages to reassess these expectations.