• NZD/USD edges higher and moves back above 0.5860 at the end of the week.
• The US Dollar softens despite ongoing geopolitical tensions in the Middle East.
• Monetary policy expectations in New Zealand help support the Kiwi.

NZD/USD trades higher around 0.5865 on Friday, gaining 0.22% at the time of writing, while the US Dollar (USD) loses ground with the US Dollar Index (DXY) down 0.18% at 98.65.

The correction in the US Dollar comes even as the geopolitical backdrop remains tense. Persistent tensions between the United States (US) and Iran, particularly around the Strait of Hormuz, continue to fuel risk aversion and underpin demand for safe-haven assets. However, this dynamic is fading as the weekend approaches, allowing currencies such as the New Zealand Dollar (NZD) to recover.

On the macroeconomic front, recent US data remains solid. Weekly Initial Jobless Claims confirmed the resilience of the labor market despite a slight increase, while S&P Global Purchasing Managers Index (PMI) readings pointed to continued expansion in business activity. This environment supports US yields and limits the downside potential for the US Dollar, even as a short-term correction unfolds.

Meanwhile, higher energy prices linked to supply disruptions are keeping inflation concerns alive. This has prompted markets to scale back expectations of monetary easing from the Federal Reserve (Fed), with rate cut bets now more limited. This factor remains structurally supportive for the US Dollar in the medium term.

In New Zealand, persistent inflation continues to fuel speculation about a tighter monetary stance. Recent data showed annual inflation holding above the central bank’s target, reinforcing expectations that the Reserve Bank of New Zealand (RBNZ) may maintain a cautious approach or even consider further tightening. This outlook helps limit downside pressure on the NZD and supports the pair’s current rebound.