Key facts
- The dollar held steady on Friday but was set for a weekly decline.
- A softer-than-expected U.S. inflation report led traders to reduce bets on imminent Federal Reserve rate hikes.
- Escalating attacks in the Middle East spurred safe-haven demand for the dollar.
- Oil prices rose to near one-month highs.
- The euro and sterling were on course for weekly gains, while the yen remained near a 40-year low.
- The dollar index was poised for a weekly drop despite safe-haven flows.
The U.S. dollar held steady on Friday, but was on track for a weekly decline as a recent tame inflation report prompted traders to scale back expectations of immediate Federal Reserve interest rate hikes. This sentiment was partially offset by escalating attacks in the Middle East, which fueled safe-haven demand for the dollar and pushed oil prices toward one-month highs.
In currency markets, the euro was trading at $1.1445, expected to finish the week up 0.29%. Sterling was at $1.3476, on course for a 0.56% gain, marking its third consecutive week of increases due to diminishing concerns about the UK's fiscal situation. The Japanese yen was trading at 162.39 per U.S. dollar, hovering near a 40-year low of 162.84, with traders remaining cautious about potential intervention from Tokyo.
The dollar index, a measure of the greenback against six major currencies, stood at 100.72, anticipating a weekly drop of 0.24%. The index had previously hit a one-month low earlier in the week as the likelihood of a near-term rate hike diminished, though safe-haven flows provided some support.
Strategists noted that the U.S. dollar remains the highest-yielding safe-haven currency in the G10 complex and tends to perform well during periods of either strong U.S. growth and higher rates or increased global risk aversion. Recent U.S. economic data, including a slight rise in retail sales for June driven by online spending and stable labor market indicators, have led economists to upgrade second-quarter growth estimates. Despite cooling consumer price inflation in June, Federal Reserve policymakers expressed caution, with Vice Chair Philip Jefferson indicating openness to further rate hikes if inflation does not show sustained improvement. The CME FedWatch tool indicated an 11% chance of a Fed hike in July, down from 25% the previous week, with traders pricing in 26 basis points of hikes by December.