FOREX-Dollar set for biggest weekly rise since October with US-Iran tensions in focus

(Updates numbers after European morning)

*

Dollar up around 1% this week

*

Increasing US-Iran tension in focus

*

Investors also awaiting US PCE, GDP data

By Sophie Kiderlin

LONDON, Feb 20 (Reuters) - The dollar was on track for its largest weekly rise since October as it remained steady on Friday, buoyed by better-than-expected economic data and a more hawkish Federal Reserve outlook, while tensions rose between the United States and Iran. The dollar index, ?which measures the greenback against a basket of currencies, was last set for a ?weekly gain of just over 1% . Jobs data lifted the dollar in the previous session, with the number of Americans filing new applications for unemployment benefits falling more than expected last week - ?underscoring labour market stability. Earlier in the week, minutes from the Fed's most recent meeting showed policymakers were divided on the outlook for rates, ?given the persistence of inflation.

"(Between) relatively solid data and a slightly less dovish Fed in terms of the ?minutes, some of this tension ?in the Middle East and ... a little bit of a positioning lining up, you can sort of see why the dollar's managed to bounce," said Dominic Bunning, head of G10 FX ?strategy at Nomura.

Investors often buy dollars when geopolitical tensions escalate.

MARKETS 'POSITIONING FOR RISK' U.S. President ?Donald Trump warned Iran on Thursday it must make a deal over its nuclear programme or "really bad things" would happen, and set Tehran a deadline of 10 to 15 days to cooperate. Iran said it would retaliate against ?U.S. bases in the region if attacked.

"Given the build-up of military presence ?in the Middle ?East and the comments from Trump, I think markets will certainly be positioning for the risk of something happening over the weekend," said Derek Halpenny, MUFG's head of research - global markets EMEA.

A jump in crude oil prices could leave various currencies, including the ?euro, Japanese yen and British pound vulnerable, Halpenny said.

"Those are the currencies where you could get some bigger moves," he added. Sterling last ?inched higher, but still languished not far off a one-month low at $1.3476 and was heading for a weekly drop of around 1.3%, its biggest since January 2025. The euro was last little changed at $1.1767 and set to lose around 0.8% for the week, with the common currency also weighed down by uncertainty over European Central Bank President Christine Lagarde's tenure.

RATES, RATES, RATES

Markets on Friday also awaited the release of the U.S. core PCE price ?index and advance ?fourth-quarter GDP figures later in the day, which could drive the next move in currencies. Investors continue ?to price in roughly two Fed rate cuts this year, though expectations for such a move in June have dipped to a roughly 56% ?chance from 62% a week ago, according to the CME FedWatch tool.

"The big argument within the Fed is whether or not to proactively lower rates to support the job market, or to keep rates higher for longer in order to fight inflation," said Chris Zaccarelli, chief investment officer for Northlight Asset Management.

Friday's PCE report will "add to the debate", Zaccarelli added. In Japan, data on Friday showed the country's annual core consumer inflation hit 2.0% in January, the slowest pace in two years.

"Today's data won't exactly instil a sense of urgency in the (Bank of Japan) to resume its tightening cycle, especially given the lacklustre rebound in activity last quarter," ?said Abhijit Surya, senior APAC economist at Capital Economics. The yen fell around 0.2% and was last at 155.27 per dollar. The currency hardly reacted to a speech on Friday by Japanese Prime Minister Sanae Takaichi, who underlined her administration's commitment to revitalising the economy. Elsewhere, the New Zealand dollar headed for ?a weekly fall of 1.4%, affected by a dovish outlook ?on rates from the Reserve Bank of New Zealand. (Reporting by Sophie Kiderlin and Rae Wee; Editing by ?Shri Navaratnam, Kate Mayberry, Helen Popper and Andrei Khalip)