The U.S. dollar weakened on Friday and moved toward a second consecutive weekly loss as investors cautiously increased bets that the war between the United States and Iran may not spiral into a broader regional economic crisis, even as sporadic hostilities continued across the Gulf.

Currency markets stabilized after President Donald Trump insisted the ceasefire framework with Iran remained intact following renewed exchanges of fire and drone attacks involving Gulf targets, including the United Arab Emirates.

While tensions remain elevated, traders increasingly appear to believe both Washington and Tehran are trying to avoid a full collapse of diplomatic efforts, particularly amid reports that indirect negotiations are continuing ahead of a closely watched Trump-Xi summit scheduled for May 14-15.

The softer tone in currency markets marked a notable reversal from the panic-driven surge into the dollar seen immediately after the Iran war erupted on February 28 and Tehran effectively tightened control over the Strait of Hormuz, one of the world’s most strategically important oil chokepoints.

At the height of those fears, investors rushed into traditional safe-haven assets while aggressively selling currencies tied to oil-importing economies such as Japan and parts of Europe.

Now, analysts say markets are recalibrating.

The dollar index, which measures the U.S. currency against major peers, fell 0.28% to 97.96 on Friday and remained close to its weakest levels since before the war began. The index is on track for a weekly decline after already falling the previous week, signaling that the initial geopolitical premium built into the dollar may be fading.

Francesco Pesole, foreign-exchange strategist at ING, said investors are increasingly focusing on whether major powers, particularly China, can pressure both sides toward de-escalation.

“The hope for risk bulls is still that China is adding pressure on the U.S. to reach some kind of deal in the Gulf before the May Trump-Xi summit,” Pesole said.

Currency strategists say the market’s behavior highlights a broader shift in sentiment across global finance, where investors are starting to treat geopolitical flare-ups as temporary disruptions unless they trigger lasting damage to energy flows, corporate earnings, or economic growth.

That shift has also been visible in equities, where technology stocks and AI-related companies have continued rallying even as military tensions persisted in the Gulf.

Analysts noted that positioning in the dollar has largely normalized after the sharp defensive buildup seen during the early phase of the conflict. Oil prices, while still elevated historically, have also pulled back from recent highs above $125 per barrel, easing fears of an immediate global energy shock.

Still, markets remain fragile.

The ceasefire has been punctuated by repeated incidents, including Iranian strikes targeting Gulf states and clashes involving U.S. naval operations near the Strait of Hormuz.

Investors remain highly sensitive to any indication that shipping lanes could face renewed disruption. Currency traders warned that another major spike in oil prices could rapidly reverse the dollar’s decline by reigniting demand for safe-haven assets.

The euro rose 0.35% to $1.1765 and appeared poised for a modest weekly gain, supported partly by improving investor confidence that Europe may avoid the worst-case economic fallout from the Gulf conflict.

However, economists continue to warn that the eurozone remains vulnerable to higher imported energy costs if tensions escalate again. Attention also remained fixed on the Japanese yen, one of the currencies most exposed to energy-market volatility because Japan imports nearly all of its oil.

The yen traded near 156.78 per dollar after Japanese officials intensified warnings against speculative attacks on the currency. Tokyo has intervened repeatedly in foreign-exchange markets in recent months as surging oil prices and widening interest-rate differentials pushed the yen toward multi-decade lows.

Japanese authorities reiterated Thursday that they remain in close coordination with U.S. officials and face no restrictions on intervention frequency.

Derek Halpenny, head of research for global markets at MUFG, said renewed instability in Hormuz could again pressure the yen sharply.

“The reports of clashes between the U.S. and Iran in the Strait of Hormuz certainly raise the risk of a renewed jump in crude oil prices that scuppers Japan’s efforts to halt a move in dollar/yen through the 160-level,” he said.

The British pound also strengthened after Prime Minister Keir Starmer signaled he would remain in office despite heavy losses for Labour in local elections.

Sterling rose 0.40% against the dollar.

Meanwhile, commodity-linked currencies such as the Australian and New Zealand dollars advanced as investor appetite for risk improved modestly.

Beyond geopolitics, markets are also awaiting the latest U.S. non-farm payrolls report, which could shape expectations for Federal Reserve policy.

Analysts say only a sharply weaker-than-expected labor report would significantly alter the current market narrative. Volkmar Baur, forex analyst at Commerzbank, said current expectations suggest little immediate change to the Federal Reserve outlook.

The broader picture emerging in global markets is one of uneasy stabilization. Investors are no longer pricing in an imminent collapse of the global economy from the Iran war, but neither are they fully convinced that the crisis has been contained. Instead, markets are increasingly trading on the assumption that diplomatic negotiations, energy volatility, and geopolitical shocks will continue to coexist for months.