The U.S. dollar edged lower on Friday after reaching its highest level in 13 months earlier in the week.
Investors paused following the currency’s strong rally. However, persistent inflation, expectations of higher U.S. interest rates and geopolitical uncertainty continued to support demand for the greenback.
U.S. Dollar Index Slips From 13-Month High
The U.S. Dollar Index fell by around 0.35% after climbing to a 13-month peak.
Despite the modest decline, the dollar remained supported by resilient U.S. inflation and hawkish comments from Federal Reserve officials. Investors also expect U.S. interest rates to remain elevated for longer than previously anticipated.
The euro recovered slightly to trade near $1.14. Meanwhile, the Japanese yen remained under significant pressure against the dollar.
Inflation Supports the U.S. Dollar Outlook
Higher inflation expectations continue to strengthen the outlook for the U.S. dollar.
Recent data showed that U.S. consumer inflation had moved above 4% for the first time in three years. The report encouraged investors to increase their bets on additional monetary policy tightening.
The Federal Reserve has also adopted a more hawkish tone, reinforcing expectations that interest rates could rise further.
According to the CME FedWatch tool, markets were pricing in a 64% probability of a 25-basis-point rate increase at the Federal Reserve’s September meeting.
UBS Expects Further Dollar Strength
UBS believes the U.S. dollar could continue to dominate global foreign exchange markets during the second half of 2026.
The bank recently raised its forecasts for the dollar against several major currencies. It cited higher U.S. interest-rate expectations and resilient economic fundamentals as key sources of support.
The large difference between U.S. and overseas interest rates continues to attract investors toward dollar-denominated assets.
As a result, the dollar is benefiting both from its higher yield and its traditional role as a safe-haven currency.
Global Markets Face Overlapping Risks
The wider financial market environment remains fragile.
Normally, a sharp decline in growth stocks would encourage investors to move into government bonds. However, persistent inflation and rising interest-rate expectations have also placed pressure on fixed-income markets.
A drone attack on a commercial oil tanker in the Strait of Hormuz added to concerns about energy supplies and geopolitical instability.
These conditions have left investors with fewer defensive options. Equities remain vulnerable to weaker demand, bonds face pressure from rising yields and energy markets are exposed to geopolitical disruption.
Japanese Yen Nears Intervention Territory
The USD/JPY exchange rate was little changed at around 161.63 after reaching 161.95 on Thursday.
That was the pair’s highest level since 1986. It also placed the yen near levels that have previously prompted Japanese authorities to intervene or warn against excessive currency movements.
The yen’s weakness continues to be driven by the wide interest-rate gap between the United States and Japan.
Tokyo Inflation Rises in June
Tokyo consumer inflation accelerated in June, broadly matching market expectations.
Core inflation, which excludes fresh food, rose to 1.6% year over year. A measure excluding both fresh food and energy increased to 1.1%.
The figures showed that underlying price pressures remain present. However, they offered little reason for the Bank of Japan to tighten monetary policy more aggressively.
Therefore, the significant difference between Japanese and U.S. interest rates continued to weigh on the yen.
Malaysian Ringgit Leads Asian Currencies
Malaysia’s ringgit remained one of the strongest-performing Asian currencies. The USD/MYR exchange rate fell by around 0.39%.
The South Korean won also strengthened, with USD/KRW declining by approximately 0.34%. Taiwan’s dollar recorded a modest improvement against the greenback.
In contrast, Indonesia’s rupiah weakened slightly, while Thailand’s baht also moved lower.
Australian and New Zealand Dollars Weaken
The Australian dollar fell by around 0.2% against the U.S. currency, while the New Zealand dollar edged slightly lower.
Both currencies extended their weekly losses as investors continued to favour the U.S. dollar.
The Australian dollar also remained under pressure following persistent inflation and resilient labour-market data.
These figures strengthened expectations that the Reserve Bank of Australia will keep monetary policy restrictive. However, investors remain divided over whether another interest-rate increase will be necessary.
Overall, the U.S. dollar paused after reaching a 13-month high, but its wider outlook remains supported by inflation, higher interest-rate expectations and global uncertainty. The yen remains particularly vulnerable as the gap between U.S. and Japanese interest rates stays wide.
