The U.S. dollar steadied on Friday but was still on pace to finish the week lower, after a softer inflation reading earlier this week prompted traders to pull back their bets on a near-term interest rate increase from the Federal Reserve.
Adding complexity to the currency picture, rising hostilities in the Middle East — where Iran and the United States have been exchanging increasingly aggressive actions, largely unraveling a truce reached last month — have driven some investors toward the dollar as a safe-haven asset, pushing oil prices close to one-month highs.
Markets were also awaiting a scheduled speech from U.S. President Donald Trump, set for 0100 GMT.
In currency trading, the euro stood at $1.1445, putting it on track for a weekly gain of 0.29%. The British pound was trading at $1.3476, heading for a 0.56% weekly rise — its third consecutive week of gains — as worries about the United Kingdom’s fiscal situation continued to ease.
The Japanese yen sat at 162.39 per dollar, hovering near the 40-year low of 162.84 it reached at the beginning of the month, with traders staying cautious about the possibility of intervention by Japanese authorities.
The dollar index — which tracks the greenback against six other major currencies — was at 100.72, pointing toward a weekly decline of 0.24%. The index had touched a one-month low earlier in the week as expectations for a near-term rate hike faded, though safe-haven flows have since offered some support.
Strategists at OCBC noted that “the USD remains the highest-yielding safe-haven currency in the G10 complex.” They also wrote that “near-term FX price action is likely to continue reflecting the ‘USD smile’ framework, under which the greenback tends to outperform when markets price either stronger U.S. growth and higher rates or a rise in global risk aversion.”
Thursday’s data showed U.S. retail sales edged higher in June, as a drop in gasoline prices weighed on service station receipts, while online spending jumped — leading economists to revise upward their estimates for second-quarter economic growth.
Further signs of economic resilience came from data showing the labor market remained stable. Economists now expect the Federal Reserve to hold interest rates steady later this month, following a report showing consumer price inflation cooled in June.
Still, policymakers are cautious about reading too much into a single month of favorable data, particularly after inflation had been moving in the wrong direction for several months prior.
Federal Reserve Vice Chair Philip Jefferson indicated he would be willing to consider raising interest rates if inflation does not show further improvement in the near term.
According to the CME FedWatch tool, the probability of a Fed rate hike in July has dropped to 11%, down from 25% implied just last week. Traders are now pricing in roughly 26 basis points of rate increases by December, compared to 44 basis points earlier in the week.
