Dollar heads for weekly drop as inflation data cools rate-hike bets, Middle East tensions cap losses

The dollar held steady on Friday but was poised for a weekly decline, as a softer-than-expected U.S. inflation report this week led traders to cut bets on imminent rate hikes from the Federal Reserve, even as escalating attacks in the Middle East spurred safe-haven bids that helped support the greenback.

Iran and the United States exchanged intensifying fire in a week-long escalation that has largely unraveled last month’s truce, according to multiple reports. The conflict pushed oil prices near one-month highs and limited the dollar’s downside, traders said.

The dollar index, which measures the U.S. currency against six major peers, was little changed at 100.72, set for a weekly drop of 0.24%, according to sources. The index hit a one-month low earlier in the week on easing chances of a near-term rate hike, but safe-haven flows have since helped support the greenback.

“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, as reported by the Miami Herald. “U.S. data releases yesterday have also helped curtail dollar selling,” he added.

Rate-hike bets unwind

The catalyst for the dollar’s weekly decline was data showing U.S. consumer price inflation cooled in June, leading economists to believe the Federal Reserve will keep interest rates unchanged later this month. Policymakers, however, remain wary of banking too heavily on one month of improvement after months when inflation moved in the wrong direction.

Chances for a Fed rate hike in July stood at 11%, compared with a 25% implied probability last week, according to the CME FedWatch tool. Traders are now pricing in 26 basis points of hikes by December, down from 44 basis points earlier this week, multiple sources reported.

“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 the Miami Herald. “We expect neither rate hikes nor cuts in 2026.”

Federal Reserve Vice Chair Philip Jefferson suggested he would be open to raising interest rates if there is no near-term improvement in inflation, according to several sources.

U.S. data on Thursday showed 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. The economy’s resilience was underscored by other data also showing labor market stability.

Currency moves

In currency markets, the euro was flat at $1.1445, set for a 0.29% rise in the week. 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.

The Japanese yen was fetching 162.39 per U.S. dollar, rooted near the 40-year low of 162.84 it touched at the start of the month. Traders remained wary of official intervention from Tokyo. Japanese Finance Minister Satsuki Katayama reiterated the government’s readiness to take decisive action, the Miami Herald reported.

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

Safe-haven dynamics

OCBC strategists noted in a note cited by multiple sources: “The USD remains the highest-yielding safe-haven currency in the G10 complex. 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.”

Investor attention later in the day will be on a speech from U.S. President Donald Trump, according to several reports.