The dollar’s movement has been shaped by two competing forces this week. On one side, signs that inflation is easing have encouraged traders to scale back expectations of aggressive monetary tightening by the Fed. On the other, rising tensions between Iran and the United States have boosted demand for traditional safe-haven assets, including the U.S. currency.
Iran and the United States exchanged increasingly intense strikes during a week-long escalation that has weakened a truce reached last month. The conflict pushed investors toward safer assets and helped lift oil prices close to their highest levels in about a month.
In the broader currency market, the euro traded at $1.1437 and was on track for a 0.2% weekly gain. Sterling stood at $1.3476, advancing 0.56% over the week and marking its third consecutive weekly increase as concerns surrounding Britain’s fiscal position continued to fade.
The Japanese yen remained under pressure, trading at 162.39 per dollar, close to the 40-year low of 162.84 reached earlier this month. Market participants continued to watch closely for possible intervention from Japanese authorities after Finance Minister Satsuki Katayama repeated that the government was prepared to take decisive steps if necessary.
The dollar index, which tracks the U.S. currency against six major peers, stood at 100.72 and was set for a weekly decline of 0.24%. The index touched a one-month low earlier in the week after traders reduced expectations of a near-term Fed rate increase, although demand for safe-haven assets helped limit further losses.
"The USD remains the highest-yielding safe-haven currency in the G10 complex," OCBC strategists said in a note.
They added that "near-term FX price action is likely to continue reflecting the 'USD smile' framework," explaining that the dollar typically performs well when markets anticipate stronger U.S. growth and higher interest rates, or when global risk aversion increases.
Markets Reassess Fed Policy Outlook
Recent economic data has complicated the outlook for U.S. monetary policy. Figures released on Thursday showed that U.S. retail sales increased modestly in June as lower gasoline prices reduced spending at service stations, while strong online purchases helped support overall consumer activity. The figures prompted some economists to raise their estimates for second-quarter economic growth.
Additional reports pointed to continued stability in the labour market, reinforcing views that the U.S. economy remains resilient despite previous concerns about inflation and slower growth.
With consumer price inflation showing signs of cooling in June, economists largely expect the Federal Reserve to leave interest rates unchanged at its upcoming meeting.
However, some policymakers and investors remain cautious about declaring victory over inflation after only a single month of improvement.
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."
Officials remain concerned that relying too heavily on one positive inflation report could be risky, especially after several months in which price pressures had moved in an unfavourable direction.
According to the CME FedWatch tool, traders now see only an 11% chance of a Fed rate hike in July, down from 25% a week earlier. Markets are currently pricing in about 26 basis points of rate increases by December.
"I don’t think July is live for rate hikes," said Tani Fukui, senior director of global economic and market strategy at MetLife Investment Management. "We expect neither rate hikes nor cuts in 2026."
Other Major Currencies Show Strength
Elsewhere, the Australian and New Zealand dollars were on course for their third consecutive weekly gains, although both currencies weakened slightly on Friday as investors turned cautious.
The Australian dollar fell 0.24% to $0.6981, while the New Zealand dollar traded at $0.5838.
China’s yuan slipped from a one-month high against the dollar but remained positioned for its third straight weekly advance.
Markets largely overlooked comments from U.S. President Donald Trump, who renewed allegations that China interfered in American elections. The remarks raised concerns that tensions could complicate the fragile agreement between Trump and Chinese President Xi Jinping.
Investors Await ECB Decision
Attention will now shift toward next week’s European Central Bank meeting. A Reuters poll showed economists expect the ECB to keep interest rates unchanged, although expectations are growing that policymakers could consider a rate increase at a later meeting.
For currency markets, the coming days are likely to be shaped by fresh signals on inflation, central bank policy direction, and developments in geopolitical tensions, particularly in the Middle East.