The U.S. dollar weakened slightly on Friday, although it remained on course to post a weekly gain. Softer U.S. inflation data reduced expectations that the Federal Reserve will raise interest rates in the near term.
Currency markets were otherwise relatively quiet. Ongoing tensions in the Middle East and elevated oil prices continued to limit larger moves.
The U.S. Dollar Index fell 0.1% to 99.82 as of 02:59 ET, or 06:59 GMT, after also closing slightly lower in the previous session.
U.S. PPI Cools Fed Rate Hike Expectations
U.S. economic data released on Thursday showed that producer prices were unexpectedly unchanged in July. The reading added to signs that inflationary pressures may be easing.
The latest producer price data followed the July consumer inflation report. Headline CPI increased 3.4% year over year, while core inflation slowed to 2.5%.
As a result, expectations for another Federal Reserve rate increase have declined. Markets now price in roughly a 35% probability of a Fed rate hike in September, compared with about 55% one week earlier, according to CME FedWatch.
Lower rate hike expectations offered some support to risk-sensitive Asian currencies. However, gains remained limited as investors continued to monitor geopolitical developments in the Middle East.
Middle East Tensions Keep Markets Cautious
Geopolitical risks remain an important factor for global currency and commodity markets.
U.S. Defense Secretary Pete Hegseth said Thursday that the American military could maintain a naval blockade of Iranian ports for an extended period. The measure forms part of President Donald Trump’s efforts to maintain economic pressure on Tehran while peace negotiations remain stalled.
Shipping through the Strait of Hormuz, one of the world’s most important routes for oil and liquefied natural gas, also remains heavily disrupted.
Higher Oil Prices Add to Inflation Concerns
Oil prices were heading for a weekly gain of around 4%, keeping inflation concerns elevated despite the softer U.S. economic data.
Higher energy prices may make it more difficult for inflation to continue falling and have limited the support that Asian currencies received from reduced Federal Reserve rate hike expectations.
Japanese Yen Heads for Weekly Loss
The USD/JPY pair slipped around 0.2% to 159.20, indicating a modest strengthening of the Japanese yen during Friday’s session.
However, USD/JPY remained on course to gain about 1% over the week, meaning the yen was headed for a weekly decline against the dollar.
The Japanese currency has surrendered part of the gains recorded following U.S.-Japan currency intervention in late July and early August. Traders are also watching the 160 yen per dollar level, which could increase speculation about additional intervention.
Expectations for a Bank of Japan rate hike in September have also increased. However, a more hawkish policy stance may be needed to provide sustained support for the yen.
Australian Dollar Gains While Yuan Holds Steady
Elsewhere in Asian currency markets, the Chinese yuan was largely unchanged, with USD/CNY trading close to flat.
The Australian dollar gained around 0.2% against the U.S. dollar, benefiting modestly from the softer U.S. inflation outlook.
