June 20 (Reuters) - The dollar was set for its biggest weekly rise in more than a month on Friday, as uncertainties about a raging war in the Middle East and the potential repercussions for the global economy fuelled an appetite for traditional safe havens.
Israel and Iran have been waging a week-long air battle as the Israeli government seeks to thwart Tehran's nuclear ambitions and market participants are nervous about possible U.S. attacks on Iran, sparking a surge in the greenback.
The dollar index, which measures the U.S. currency against six peers, including the Swiss franc, the Japanese yen and the euro, is poised to rise 0.6% this week.
Iran said on Friday it would not discuss the future of its nuclear programme while under attack by Israel, as Europe tried to coax Tehran back into negotiations.
Meanwhile, the White House said on Thursday that President Donald Trump would decide on a potential involvement of the U.S. in the conflict in the next two weeks.
That helped soothe nervous investors worried about an imminent U.S. attack on Iran, even though the prospect of a broadening Middle East conflict kept risk appetite in check.
Brent crude prices eased more than 2%, but at $77 a barrel it was close to the January peak it hit last week.
The drop supported the currencies of net oil importing economies such as the euro and the yen. The euro firmed 0.2% to $1.1519, while the yen was flat at 145.44 per dollar.
"FX price action suggests the brief push higher in the (U.S. dollar) yesterday through trend resistance that has dictated the slide in the index since January has been rejected," analysts at Scotiabank said.
"The broader decline may start to reassert itself after the short consolidation seen in the (U.S. dollar) generally over the past week."
The recent spike in oil prices added a new layer of inflation uncertainty for central banks across regions which have been grappling with the potential impact of U.S. tariffs on their economies.
"That makes central banks' jobs much harder," said Charu Chanana, chief investment strategist at Saxo. "Do they ease to support growth or hold back to avoid fuelling inflation? Most seem to be prioritising growth concerns for now, assuming that crude gains may not be sustained."
Although the Federal Reserve earlier this week stuck with its forecast of two interest rate cuts this year, Chair Jerome Powell warned of "meaningful" inflation ahead.
Analysts saw the central bank's delivery as a "hawkish tilt" further underpinning the greenback's gains this week.
The Swiss franc was steady at 0.817 per dollar but was set for its largest weekly drop since mid-April after the country's central bank lowered interest rates to 0%.
Investors were, however, taken aback by an unexpected 25-basis-point interest rate cut by Norges Bank and the krone is down by more than 1% against the dollar this week.
Though geopolitical tensions were the main market focus this week, concerns about a trade war and the impact it may have on costs, corporate margins and overall growth are ever-present, as Trump's early July tariff deadline looms. These concerns have weighed on the dollar, which is down about 9% this year.
Currencies positively correlated to risk sentiment such as the Australian and New Zealand dollars were broadly flat.
Elsewhere, the yuan inched up and last fetched 7.18 after China kept benchmark lending rates unchanged as expected.
Sterling inched up at $1.349, returning close to earlier levels after briefly paring some gains as British retail sales data showed volumes recorded their sharpest drop since December 2023 last month.
Reporting by Johann M Cherian in Bengaluru and Linda Pasquini in Gdansk; Editing by Edwina Gibbs, Shri Navaratnam, David Evans and Alex Richardson
