The U.S. dollar extended its gains against the Japanese yen and the euro on Friday, as renewed uncertainty surrounding efforts to resolve the U.S.-Iran conflict increased demand for the greenback as a traditional safe-haven asset.
Investor sentiment was also supported by rising U.S. Treasury yields after a Financial Times report, citing sources close to Federal Reserve Chair Kevin Warsh, suggested policymakers could consider an interest rate hike as early as September if inflation data remains elevated.
Market participants are now turning their attention to the closely watched U.S. nonfarm payrolls report due later on Friday, which could provide fresh guidance on the Federal Reserve's next policy move.
The dollar edged up to 158.505 yen during Asian trading after climbing 0.4% in the previous session. The currency is now on track to gain roughly 0.7% for the week, recovering from sharp losses earlier this week following coordinated intervention by Japanese and U.S. authorities. That intervention pushed the dollar from levels near a four-decade high above 163 yen on Thursday to a 13-week low of 155.20 on Monday.
Against the euro, the greenback also strengthened modestly, trading at $1.1521 after advancing around 0.3% in Thursday's session.
Geopolitical developments in the Gulf continued to influence financial markets after Reuters reported that a proposed agreement involving Iran and Oman to help end the U.S.-Iran conflict could grant Tehran control over inbound traffic through the Strait of Hormuz.
While the United States has not officially responded to the proposal, President Donald Trump has maintained that an agreement to reopen the strategic waterway is close. However, U.S. officials have consistently insisted they would never accept Iranian control over access to the Strait of Hormuz, one of the world's most critical routes for global energy supplies.
The uncertainty surrounding the negotiations also pushed oil prices higher. Brent crude rose by more than $1 on Friday to trade at $83.55 per barrel after surging by more than $3 in the previous trading session.
Higher crude prices raised fresh concerns about inflation, putting pressure on U.S. Treasury bonds and driving yields upward, a development that further supported the U.S. dollar.
"USD was supported by higher oil prices (following) news that a deal between the U.S. and Iran to reopen the strait is further away than hoped," said Kristina Clifton, an economist at Commonwealth Bank of Australia.
Clifton also pointed to the Financial Times report indicating that Warsh could support a September rate increase if inflation remains strong. However, she cautioned that her base-case outlook remains unchanged.
"We expect the Fed to wait until December before starting a modest tightening cycle," she added.
The Federal Reserve left interest rates unchanged at its last policy meeting despite divisions among policymakers, while Warsh reiterated his commitment to ensuring inflation returns to target.
Attention is now firmly on Friday's employment figures. According to a Reuters survey of economists, U.S. nonfarm payrolls are expected to have increased by 80,000 jobs in July, following a gain of 57,000 in June. The unemployment rate is forecast to remain steady at 4.2%.
In broader currency markets, the dollar also posted modest gains against the British pound, with sterling slipping to $1.3449. Meanwhile, the Australian dollar eased to $0.7029, while New Zealand's kiwi dollar edged lower to $0.5866 as investors adopted a cautious stance ahead of the key U.S. economic data.