The U.S. dollar recovered on Friday but remained on course to record a monthly decline of around 1%. Softer-than-expected inflation data and uncertainty over the Federal Reserve’s interest rate outlook continued to weigh on the currency.
Meanwhile, the euro and Japanese yen were set to finish July with notable monthly gains.
U.S. Dollar Index Rebounds
The U.S. Dollar Index, which tracks the greenback against six major currencies, rose 0.32% to 100.19 at 09:44 ET.
The increase helped the dollar recover some of its earlier losses. However, the index was still heading for a decline of approximately 1% in July.
Most of the monthly weakness occurred during the final week. The Federal Reserve kept interest rates unchanged, while Chair Kevin Warsh provided few clear signals about the central bank’s next policy move.
Softer Inflation Clouds the Fed Outlook
Expectations for additional U.S. interest rate increases weakened after the release of the June Personal Consumption Expenditures price index.
The PCE index, which is the Federal Reserve’s preferred inflation measure, came in below forecasts. However, underlying inflation remained above the central bank’s annual target of 2%.
The softer report increased uncertainty over whether the Fed will maintain higher rates or consider easing monetary policy later in the year.
Lower interest rate expectations can pressure the dollar because they reduce the potential returns available from U.S. assets.
Euro Secures a Monthly Gain
The euro fell 0.2% during Friday’s session to around $1.1380. Despite the daily decline, the currency was set to gain approximately 0.8% in July.
The euro received support from new Eurostat figures showing that Eurozone inflation increased to 2.9% in July from 2.8% in June.
Higher energy prices were a major factor behind the increase. Oil costs rose following an escalation in military tensions between the United States and Iran.
Core inflation, which excludes volatile food and energy prices, accelerated to 2.5%. Services inflation also increased, reaching 3.3%.
Eurozone Data Supports ECB Rate-Hike Expectations
The latest inflation report followed stronger-than-expected Eurozone economic growth.
The regional economy expanded by 0.4% during the second quarter. This was twice the rate that financial markets had anticipated.
The combination of persistent inflation and resilient economic activity strengthened expectations that the European Central Bank could raise interest rates at its September 10 meeting.
Markets were pricing in more than two ECB rate increases by early next year. However, economists warned that weaker labor market conditions and slower food-price growth could limit the need for aggressive monetary tightening.
Japanese Yen Records Strong July Performance
The Japanese yen weakened by around 0.2% against the dollar on Friday.
The decline followed the Bank of Japan’s decision to keep interest rates unchanged. The central bank also lowered its inflation forecast.
The USD/JPY exchange rate had fallen as low as 158 overnight amid speculation that Japanese authorities had intervened in the currency market with support from U.S. officials.
Despite Friday’s pullback, the yen gained approximately 1.6% against the dollar during July. This marked its strongest monthly performance since October.
The currency benefited from government support and expectations that the Bank of Japan will continue normalizing monetary policy later in the year.
British Pound Falls as Investors Remain Cautious
The British pound declined by 0.2% against the dollar, moving broadly in line with other major currencies.
Investor sentiment remained cautious because of the continuing Middle East conflict and sharp fluctuations in energy prices.
Traders were also preparing for several important central bank meetings scheduled for August.
Overall, the U.S. dollar ended July under pressure as cooling inflation complicated the Federal Reserve’s policy outlook. In contrast, the euro and yen benefited from expectations of tighter monetary policy in Europe and Japan.
