Weekend Risk Brings Dollar Buyers Back Despite Fed Repricing

The dollar staged a broad rebound on Friday. The move reflected position management ahead of a volatile weekend, not a reversal of the week's bearish trend. Traders cut short positions after Thursday's sharp selloff, worried that renewed Middle East escalation could quickly reverse the macro backdrop that had driven the greenback lower.

The recovery did little to alter the broader picture. The dollar was still the weakest major currency for the week, pressured by fading expectations for a near-term Federal Reserve rate hike after softer US GDP and cooling inflation data. Friday's bounce was about prudent risk management, not conviction, several traders said.

Oil prices offered the clearest sign that markets are far from convinced the crisis is over. Brent crude climbed back above $88 a barrel. Traders said the price still includes a meaningful geopolitical premium. Commonwealth Bank of Australia estimates tanker traffic through the Strait of Hormuz has recovered to roughly 30-35% of pre-conflict levels, though the actual degree of recovery remains uncertain, with shipping trackers offering widely differing assessments. Even if those estimates are accurate, throughput would still be running at about one-third of normal capacity. Brent's futures curve remains in backwardation. Traders said the shape reflects expectations of tight near-term supply rather than a rapid normalization. Analysts said the broader conflict has shown little sign of genuine de-escalation. This week's sequence of temporary pauses and renewed missile attacks left multiple flashpoints active, including the Red Sea and key Saudi energy infrastructure, analysts said.

Against that backdrop, reducing dollar shorts before the weekend became a rational risk-management decision. Any renewed escalation involving Iran could deliver a double-positive shock for the greenback. 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. Those two channels would reinforce each other, making the dollar particularly sensitive to geopolitical headlines over the coming days, traders said.