The U.S. dollar slipped modestly on Friday but was positioned to notch a second consecutive weekly gain as solid economic data reinforced expectations that the Federal Reserve may postpone interest rate cuts.
At 04:15 ET (08:15 GMT), the Dollar Index, measuring the greenback against six major currencies, declined 0.4% to 98.100. Despite the drop, the index was on track to close the week with a 0.7% gain, following a near 1% rise last week.
Dollar Strength Supported by Economic Resilience
Recent economic releases pointed to sustained strength in the U.S. economy, bolstering the case for the Fed to hold off on easing monetary policy.
Thursday’s data showed retail sales in June exceeded forecasts, while initial unemployment claims fell to their lowest point in three months, signaling robust consumer activity.
Earlier in the week, a report indicated that consumer inflation accelerated to its fastest rate in five months, likely influenced by tariffs.
“One of our key calls this summer is that this return to dollar ‘functionality’ reduces the likelihood of new selloffs – unless Trump fires Fed Chair Jay Powell (as Wednesday’s brief dollar collapse showed) or escalates protectionism beyond markets’ current tolerance, particularly against China,” ING analysts said in a note.
“We don’t expect either, and still see some dollar support in the coming months as the 14bp priced into the Fed’s September contract unwinds.”
Markets currently price around 45 basis points of Fed rate cuts for the rest of the year, down slightly from earlier expectations near 50 basis points.
Friday’s schedule includes important housing data and the University of Michigan consumer sentiment index.
Euro Recovers From Lows, Pound Weighed Down by Weak UK Data
The euro rose 0.3% to 1.1623 against the dollar, recovering from a three-week low of 1.1556 recorded on Thursday. Still, it faces a weekly loss of about 0.6%.
German producer prices dropped 1.3% annually in June, aligning with forecasts. Meanwhile, the final eurozone inflation reading confirmed a 2.0% year-on-year increase, matching the ECB’s target.
With inflation pressures subdued in Germany, the ECB might have leeway for further stimulus. However, President Trump’s proposed 30% tariffs on EU imports could complicate the central bank’s decisions.
Following its June meeting, the ECB indicated interest rates would likely remain steady later this month. Still, ING cautioned that surprises were possible.
“That said, the ECB meeting may prove less dull than expected,” ING said. “A cut is highly unlikely given recent communication, but tariff risks and a strong euro could revitalize a dovish front that otherwise seemed settled on a neutral pivot.”
Meanwhile, GBP/USD rose 0.2% to 1.3432 but was set for a 0.5% weekly decline. Recent data showing a rise in the UK unemployment rate and a contraction in May GDP suggest the Bank of England may need to continue easing rates.
Yen Drops on Political Uncertainty
The USD/JPY pair edged up 0.1% to 148.63, with the yen on track for a roughly 0.8% weekly loss amid concerns Japan’s ruling coalition may lose its majority in upcoming elections.
A weaker government could empower opposition parties advocating consumption tax cuts to alleviate inflation’s impact on consumers.
Friday’s data revealed Japan’s core inflation eased slightly in June but stayed above the Bank of Japan’s 2% target.
Aussie Dollar and Yuan See Movement
The Australian dollar bounced 0.5% to 0.6516 after falling to its lowest level in over three weeks amid soft jobs figures, fueling expectations for an RBA rate cut.
The Chinese yuan also slipped slightly, with USD/CNY down 0.1% to 7.1782.
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