The US dollar edged slightly higher on Friday, but remained on track for a weekly loss, as rising energy prices reshaped global interest rate expectations and left the Federal Reserve as the only major central bank not expected to hike rates this year.

Before the outbreak of the USIsraelIran conflict in late February, investors had been pricing in two Fed rate cuts in 2026. Those expectations have since been scaled back sharply, while other central banks have turned more hawkish.

Gains for major currencies

The euro, yen, pound sterling, and Swiss franc all posted weekly gains against the dollar, as policymakers signaled readiness to raise interest rates to counter inflationary pressures driven by the energy crisis.

The euro rose about 1.4% over the week despite easing slightly to $1.1571

The yen gained 0.7% to 158.59 per dollar

Sterling advanced 1.3% to $1.3391

Analysts said the dollar is under pressure due to the unexpected hawkish shift among non-US central banks, alongside a relative improvement in energy market expectations.

Central banks turn hawkish

The European Central Bank left interest rates unchanged but warned of rising inflation due to energy, with expectations that discussions around rate hikes could begin soon, possibly leading to increases in the coming months.

The Bank of England also held rates steady but signaled readiness to act, prompting markets to price in tightening of around 80 basis points this year.

In Japan, policymakers hinted at the possibility of a near-term rate hike, supporting the yen, while the Reserve Bank of Australia raised rates for the second time in two months.

A different stance from the Fed

In contrast, the Federal Reserve kept rates unchanged, with Chair Jerome Powell stressing that it is too early to assess the economic impact of the war.

Traders have largely abandoned expectations for rate cuts this year, but have yet to price in hikesunlike in other major economies.

Impact of war and energy

Brent crude prices have surged 50% since the start of the conflict, driven by supply disruptions and the near-total closure of the Strait of Hormuz.

Despite the dollars weekly decline, some analysts believe the weakness may not last, as the currency could regain strength on safe-haven demand, particularly if the conflict persists and given the US role as a major energy producer.

Overall, currency movements reflect a significant shift in global monetary policy expectations, driven by the energy crisis and escalating geopolitical tensions.