Dollar Poised for Weekly Drop as Inflation Data Eases Rate Hike Bets

The dollar held steady on Friday but was set for a weekly decline, as a softer-than-expected U.S. inflation report prompted traders to reduce wagers on near-term Federal Reserve rate hikes, according to multiple sources. The U.S. dollar index, which measures the currency against six major peers, traded little changed at 100.69, on track for a weekly drop of 0.3%, per one source, while another source reported the index at 100.72 with a 0.24% weekly decline. The index hit a one-month low earlier in the week as rate hike expectations faded, but safe-haven flows supported the greenback.

The euro was flat at $1.145, set for a 0.3% rise in the week, according to one source; another source reported the euro at $1.1445, heading for a 0.29% gain. Sterling fetched $1.3476, on course for a 0.56% weekly gain — its third straight week of gains — on fading concerns over Britain’s fiscal outlook, according to sources. The Japanese yen was slightly stronger at 162.26 per dollar, remaining near the 40-year low of 162.84 touched at the start of the month, as traders remained wary of official intervention from Tokyo. Japanese Finance Minister Satsuki Katayama reiterated the government's readiness to take decisive action, one source reported.

Escalating attacks in the Middle East provided a counterweight to the dollar’s weakness. Iran and the United States exchanged intensifying fire in a week-long escalation that largely unraveled last month’s truce, spurring safe-haven bids for the dollar and pushing oil prices near one-month highs, multiple sources reported. "There has been no let-up in the escalation of the conflict in the Middle East which continues to curtail appetite to sell the dollar," said Derek Halpenny, a senior currency strategist at MUFG, according to one source. "U.S. data releases yesterday have also helped curtail dollar selling," he added.

Investor attention on Friday shifted to a speech from U.S. President Donald Trump at 0100 GMT, several sources noted.

Data released Thursday showed U.S. retail sales rose slightly in June, as lower gasoline prices weighed on receipts at service stations but online spending surged, prompting economists to upgrade their second-quarter growth estimates, according to sources. The economy’s resilience was underscored by other data also showing labor market stability. Economists believe the Federal Reserve would keep interest rates unchanged later this month after data showed consumer price inflation had cooled in June. However, policymakers are wary of banking too heavily on one month of improvement after months when inflation moved in the wrong direction. Federal Reserve Vice Chair Philip Jefferson suggested he would be open to raising interest rates if there is no near-term improvement in inflation, two sources reported.

Chances for a Fed hike in July stood at 11%, versus a 25% implied probability last week, according to the CME FedWatch tool, sources reported. Traders are pricing in 26 basis points of hikes by December, down from 44 bps earlier this week, per one source, while another source said traders were pricing in 26 bps of hikes by December versus 44 bps earlier in the week. "I don't think July is live for rate hikes," said Tani Fukui, senior director of global economic and market strategy for MetLife Investment Management, as reported by one source. "We expect neither rate hikes nor cuts in 2026."

OCBC strategists noted in a note cited by multiple sources that "the USD remains the highest-yielding safe-haven currency in the G10 complex." They added 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."

The Australian dollar was 0.24% softer on the day at $0.6981, as risk-off sentiment prevailed with global stocks falling sharply, according to one source. China’s yuan weakened from a one-month high against the dollar but remained on track for its third straight week of gains, that source reported.