The US currency is set to close out its best week in four months. Traders are sharply reducing bets on Fed easing, and the threat of a Middle East conflict is returning the dollar to its status as the top safe-haven asset, according to Bloomberg.

The minutes of the last Fed meeting showed that officials are wary of lowering rates due to stubborn inflation, and some even suggested the possibility of raising them. Strong labor market data confirmed the stability of the US economy. Investors are now expecting a 58-basis-point rate cut in 2026, compared to the previous expectation of 63 basis points.

The buildup of US military forces in the Persian Gulf and Donald Trump's ultimatum to Iran have increased demand for safe assets. And rising oil prices make traditional safe-haven currencies (the yen and the euro) vulnerable, so investors are fleeing to the dollar.

Until this week, speculators held the highest volume of short positions in the dollar since June. Now, against a backdrop of strong statistics, they are forced to close these positions urgently, which gives the rally an additional boost.