The dollar declined on Friday and is heading to record its largest weekly drop since January, as investors sell safe-haven assets amid optimism that oil shipments may resume if the truce in the Gulf holds.

The dollar had risen strongly in March as one of the most prominent safe havens, after the American and Israeli war on Iran led to a jump in oil prices and a decline in stocks and gold, while concerns regarding inflation put pressure on bonds.

But since the agreement on a fragile truce on Tuesday, investors have begun to abandon those positions.

The euro rose by 1.6% this week to reach $1.1712, while the British pound climbed by 1.9% since Monday to reach $1.344.

The risk-sensitive currencies of Australia and New Zealand are also heading toward weekly gains of approximately 3% against the dollar, with the Australian dollar trading at slightly over 70 cents.

Movements in the Asian and European sessions were limited on Friday. U.S. inflation data is scheduled for release later today, but the market trend may depend more heavily on the results of peace talks scheduled for the weekend between the United States and Iran in Islamabad.

Jason Wong, senior strategist at BNZ Bank in Wellington, said: "Investors were buying the U.S. dollar when the war was in its most tense stages, and now they are selling it as the probability of a worst-case scenario recedes."

He added that removing that extreme risk thanks to the truce is important from a sentiment perspective, even if the truce itself appears unstable, noting that the mood in the markets could change quickly if the peace talks anticipated over the weekend do not achieve progress.

Fragile truce

Wong said that if the talks yield positive results, it will be negative for the dollar, but if the results of the talks are poor by Monday and ship movements remain limited, conditions could flip quickly.

In the Strait of Hormuz, there were no significant signs of improvement in the situation. During the first 24 hours of the truce, only one petroleum product tanker and five bulk carriers crossed the corridor, which used to receive about 140 ships per day before the war.

As for the Japanese yen, which has been under pressure for years due to low interest rates in Japan and its sensitivity to high oil prices, it rose slightly from its lowest levels against the dollar, but it did not achieve significant gains, and it was also sold against other currencies, indicating continued weak demand for it.

The yen fell to 159.19 against the dollar on Friday, while the U.S. dollar index declined by 0.1%, making it down by about 1.4% since the beginning of the week.

As for the Chinese yuan, which has not seen a major decline since the outbreak of the war with Iran on February 28, it is heading to record its largest weekly gains in 15 months and is trading at its strongest levels since 2023.

Data released on Friday showed that factory-gate prices in China rose for the first time in three years, in a sign that real inflation may begin to appear after a long period of facing deflation.

Lynn Song, an economist at ING Bank, said: "The Chinese yuan was one of the surprise winners in the Iran war, even though China is the largest oil importer in the world."

She added that some market participants have begun re-evaluating the "China risk premium" in light of increasing uncertainty elsewhere in the world, which has made China appear more stable in the eyes of investors.