The dollar held steady on Friday but was poised for a weekly decline as a tame US inflation report this week led traders to cut bets on imminent rate hikes from the Federal Reserve, although escalating attacks in the Middle East soured sentiment. Iran and the United States exchanged intensifying fire in a week-long escalation that has largely unraveled last month's truce, spurring safe haven bids for the dollar and leading oil prices near one-month highs. In currency markets, the euro was at $1.1437, set for a 0.2% rise in the week. Sterling fetched $1.3476, on course for a 0.56% gain in the week, its third straight week of gains on fading concerns over Britain's fiscal outlook. The Japanese yen was fetching 162.39 per US 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 after Japanese Finance Minister Satsuki Katayama reiterated the government's readiness to take decisive action. The dollar index, which measures the US currency against six other units, was at 100.72, set for a weekly drop of 0.24%. The index hit a one-month low earlier this week on easing chances of a near term rate hike but safe-haven flows have helped support the greenback. "The USD remains the highest-yielding safe-haven currency in the G10 complex," OCBC strategists said in a note. "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 US growth and higher rates or a rise in global risk aversion," they wrote. Data on Thursday showed US 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. Economists believe the Federal Reserve would keep interest rates unchanged later this month after data showed consumer price inflation had cooled in June. Karen Manna, portfolio manager for fixed income at Federated Hermes, said: "It is far too early to conclude that a renewed disinflation trend has taken hold or that inflation concerns have been fully resolved." Policymakers are also wary of banking too heavily on one month of improvement after months when inflation moved in the wrong direction. Chances for a Fed hike in July stood at 11%, versus a 25% implied probability last week, according to the CME FedWatch tool. Traders are pricing in 26 basis points of hikes by December. "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. "We expect neither rate hikes nor cuts in 2026." In other currencies, the Australian and New Zealand dollars were poised for a third straight week of gains. The Aussie was 0.24% softer on the day at $0.6981 as risk-off sentiment prevailed. The kiwi was at $0.5838. China's yuan weakened from a one-month high against the dollar, but remained on track for its third straight week of gains. Markets mostly shrugged off comments from President Donald Trump after he renewed accusations that China meddled in US elections, a move that could complicate his fragile truce with Chinese leader Xi Jinping. Investor focus next week will be on the policy decision from the European Central Bank where it is expected to hold interest rates steady, according to a Reuters poll. But a rate hike next month is increasingly likely, economists say.
