Dollar Ends Week Lower as Inflation Cools, Dampening Fed Rate Hike Expectations

The US dollar ended the week lower on Friday (17th) as recent economic data showed easing price pressures in the United States, prompting markets to scale back expectations of a near-term rate hike by the Federal Reserve (Fed). However, hawkish comments from Fed officials and escalating tensions in the Middle East limited the dollar's decline.

In late New York trading, the dollar index (DXY), which tracks the dollar against six major currencies, was flat at 100.77, down 0.2% for the week.

Earlier in the week, escalating conflict between the US and Iran briefly drove safe-haven flows into the dollar. However, for the foreign exchange market, the more significant development was the latest US inflation data.

June's US Consumer Price Index (CPI) and Producer Price Index (PPI) both showed slower month-on-month increases, while retail sales at gas stations declined, indicating cooling inflationary pressures. Additionally, a University of Michigan survey showed July consumer sentiment rose to its highest level since February, while one-year inflation expectations fell further.

This series of data suggests the Fed does not need to rush into a rate hike, further weighing on the dollar.

However, inflation outlooks shifted rapidly this week. As the US and Iran entered a new round of conflict, oil prices surged, reigniting market concerns about inflation. Moreover, several Fed officials noted that factors such as artificial intelligence (AI)-related demand are also pushing up prices. Dallas Fed President Lorie Logan said on Thursday that rates may need to be "moderately higher."

Pound, Euro Gain on Weekly Basis

Elsewhere among major currencies, the British pound continued to rise modestly this week. Reports indicated that incoming UK Prime Minister Andy Burnham appointed a centrist figure as finance minister, helping to ease market concerns about the direction of future UK fiscal policy.

The pound fell 0.2% against the dollar but remained one of the better-performing major currencies this week, supported by a weaker dollar and reduced political uncertainty in the UK.

The euro fell 0.2% against the dollar but posted a weekly gain of 0.2%.

The dollar-yen pair held around 162.40, with the yen remaining close to its nearly 40-year low of 162.84 set earlier this month.

The large US-Japan interest rate differential continues to support the dollar, while Prime Minister Sanae Takaichi's proposed fiscal spending plan has further undermined market confidence in the yen.

Markets continue to closely watch the risk of Japanese government intervention in the currency market. Japanese Finance Minister Satsuki Katayama reiterated that authorities are prepared to act if exchange rates experience excessive volatility.

The Japanese government previously spent a record 11.73 trillion yen propping up the yen between late April and late May. However, recent statements by senior Japanese officials have not repeated the earlier pledge to "take decisive action."

As of approximately 6:00 AM Taiwan time on Saturday (18th), prices were:

Dollar index at 100.7617 (+0.0440%) EUR/USD at 1.1437 (-0.0524%) GBP/USD at 1.3450 (-0.2077%) AUD/USD at 0.6980 (-0.2430%) USD/CAD at 1.4019 (-0.1496%) USD/JPY at 162.3800 (+0.0308%)