The U.S. dollar advanced on Friday as investors rushed back into the currency and other safe-haven assets including U.S. Treasury bonds and gold after Israel launched widescale strikes against Iran, sparking Iranian retaliation.
Israel said it targeted a wide range of military targets in Iran, in response to which Iran launched a barrage of drones.
"The geopolitical escalation adds another layer of uncertainty to already fragile sentiment," said Charu Chanana, chief investment strategist at Saxo.
"The key question now is whether this marks a brief flare-up or the beginning of broader regional escalation. If tensions rise, particularly with any threat to oil supply routes, the risk-off mood could persist, keeping upward pressure on crude and haven assets."
U.S. and Iranian officials were due to hold a sixth round of talks in Oman on Sunday on Tehran's uranium enrichment programme. Israel's ambassador to the United Nations said the government's determination to strike Iranian targets was an independent decision.
An index that measures the U.S. dollar against six other currencies rose 0.61% and was last at 98.28.
The Japanese yen and the Swiss franc , both also considered safe-haven currencies, were steady against the dollar, after rallying about 0.5% each earlier in the day.
The U.S. dollar's biggest gains were against currencies positively correlated to risk sentiment - the Aussie dollar and the New Zealand dollar - which both weakened about 1% each. The euro reversed a four-day rally to trade down 0.5% at $1.1528.
Investors also snapped up U.S. Treasury bonds, sending the yield on the benchmark 10-year note down as much as 4.7 basis points at one point to a more-than-one-month low of 4.31%. Gold prices jumped 1.1% to their strongest since early May.
U.S. DOLLAR SET FOR WEEKLY LOSS
Friday's developments created more uncertainty for investors navigating a broad range of concerns about the outlook for global trade and inflation.
Despite the day's gains, the U.S. dollar index was trading close to its lowest level since March 2022, which it hit earlier this week, as a U.S.-China trade truce offered little clarity and U.S. President Donald Trump said he would outline unilateral terms of trade with other economies in the days to come.
The index is on track for a weekly decline of nearly 1%, its biggest drop in more than three weeks, and is set for losses against the yen, the Swiss franc and the euro.
"Geopolitical noise may temporarily distort the dollar downtrend and temporarily weigh on risk proxies especially heading into the weekend," said Christopher Wong, a currency strategist at OCBC.
Two inflation reports this week showed price pressures were contained, fuelling expectations of more aggressive interest rate cuts by the U.S. Federal Reserve. But tariffs could filter into prices in the coming months, analysts warned.
Following Israeli strikes, crude prices , jumped more than $5 a barrel on fears of supply disruptions in the oil-rich region, which could also add to price pressures.
Later on Friday, investors will assess the University of Michigan's preliminary survey out of the U.S. for a look at how consumers have fared this month. Final consumer inflation reports are also expected out of Germany, France and Spain.
Decisions from the Fed, the Bank of Japan and the Bank of England are expected next week that could offer investors more clarity on the path ahead for interest rates.
The risk-off mood also hit cryptocurrencies on Friday. Bitcoin eased 1.5% to $104,336, while ether prices declined over 4.7% to $2,516.
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