The U.S. dollar was little changed on Friday but remained on track for a weekly decline after softer inflation data reduced expectations of an imminent Federal Reserve rate hike.

Safe-haven demand linked to escalating tensions between the United States and Iran provided some support to the greenback, limiting its losses as oil prices traded near one-month highs.

Dollar Index Set for Weekly Loss

The U.S. Dollar Index, which measures the currency against six major peers, traded near 100.72 and was heading for a weekly decline of approximately 0.24%.

The index touched a one-month low earlier in the week as traders lowered their expectations for near-term monetary tightening. However, renewed geopolitical risk helped stabilize the dollar.

The euro traded around $1.1445, on course for a weekly gain of 0.29%, while the British pound rose to approximately $1.3476, heading for its third consecutive weekly advance.

The Japanese yen remained weak near 162.39 per dollar, close to its lowest level in around 40 years, keeping markets alert to the possibility of intervention by Japanese authorities.

Softer Inflation Reduces Rate-Hike Expectations

Recent data showed that U.S. consumer inflation cooled in June, strengthening expectations that the Federal Reserve will keep interest rates unchanged at its next meeting.

According to the CME FedWatch tool, the probability of a July rate increase fell to 11%, down from approximately 25% a week earlier.

Traders are now pricing in around 26 basis points of rate increases by December, compared with 44 basis points earlier in the week.

Despite the improvement in inflation, Fed officials remain cautious about drawing conclusions from a single month of data. Federal Reserve Vice Chair Philip Jefferson indicated that another rate increase could still be considered if inflation fails to improve further.

U.S. Economy Remains Resilient

U.S. retail sales increased slightly in June, supported by strong online spending, even as lower gasoline prices reduced receipts at service stations.

Other data also pointed to continued stability in the labor market, leading some economists to raise their estimates for second-quarter economic growth.

This resilience could prevent the Fed from adopting a more accommodative stance, even though the case for an immediate rate increase has weakened.

Middle East Tensions Support Safe-Haven Demand

The United States and Iran exchanged intensified attacks during the week, further weakening the truce reached the previous month.

The escalation pushed oil prices close to one-month highs and increased demand for traditional safe-haven assets, including the U.S. dollar.

Analysts noted that the dollar remains one of the highest-yielding safe-haven currencies among G10 economies. As a result, it may strengthen during periods of either robust U.S. growth or heightened global risk aversion. Currency markets, naturally, prefer having two contradictory reasons to buy the same asset.

Conclusion

The dollar is set to end the week lower as cooling inflation reduces expectations of a July rate hike.

However, resilient U.S. economic data and escalating tensions in the Middle East continue to provide support. The dollar’s next direction will depend on incoming inflation figures, Federal Reserve guidance and developments in the U.S.–Iran conflict.

Source: Reuters