Dollar heads for weekly decline as softer US inflation reduces rate hike bets

The US dollar was on course for a weekly decline on Friday after softer inflation data prompted traders to scale back expectations of near-term interest rate increases by the Federal Reserve.

The dollar index, which measures the US currency against six major peers, stood at 100.72 and was set to fall 0.24% over the week. It touched a one-month low earlier in the week as markets reduced the likelihood of an imminent rate hike.

The currency remained supported by safe-haven demand as fighting between the United States and Iran intensified, largely reversing last month’s truce and pushing oil prices close to one-month highs.

“The USD remains the highest-yielding safe-haven currency in the G10 complex,” OCBC strategists said in a note.

They said near-term currency moves were likely to continue reflecting the “USD smile”, under which the dollar strengthens either when markets expect stronger US growth and higher interest rates or when global risk aversion increases.

Markets assigned an 11% probability to a Federal Reserve rate increase in July, down from 25% a week earlier, according to the CME FedWatch tool. Traders were pricing in 26 basis points of rate increases by December, compared with 44 basis points earlier in the week.

US data released on Thursday showed retail sales increased slightly in June, with lower gasoline prices reducing service-station receipts while online spending rose sharply. The figures led some economists to raise their estimates for second-quarter economic growth.

Separate data indicated continued stability in the labour market. Economists expect the Federal Reserve to leave rates unchanged later this month after consumer price inflation slowed in June.

Federal Reserve officials, however, remain cautious about relying on a single month of improved inflation data. Vice Chair Philip Jefferson said he could support raising rates if inflation failed to improve in the near term.

The euro traded at $1.1445 and was heading for a weekly gain of 0.29%.

Sterling stood at $1.3476 and was set to rise 0.56% for the week, marking its third consecutive weekly advance as concerns over Britain’s fiscal outlook eased.

The Japanese yen remained near four-decade lows at 162.39 per dollar, close to the 162.84 level reached earlier this month. Traders remained alert to the possibility of intervention by Japanese authorities.

Investors were also awaiting a speech by US President Donald Trump scheduled for 0100 GMT.