The dollar maintained its position on Friday, yet it was set to experience a weekly decline following a subdued U.S. inflation report this week, which prompted traders to reduce expectations for immediate rate hikes from the Federal Reserve. Meanwhile, escalating tensions in the Middle East dampened market sentiment. Iran and the United States engaged in escalating hostilities over the course of a week, effectively dismantling the truce established last month. This development has prompted increased demand for the dollar as a safe haven and has driven oil prices to approach one-month highs. In currency markets, the euro was at $1.1437, poised for a 0.2% increase over the week. Sterling fetched $1.3476, on course for a 0.56% gain in the week, marking its third consecutive week of gains as concerns over Britain’s fiscal outlook continue to diminish.

The Japanese yen was trading at 162.39 per U.S. dollar, remaining close to the 40-year low of 162.84 it reached at the beginning of the month. Traders maintained a cautious stance regarding potential official intervention from Tokyo, following remarks from Japanese Finance Minister Satsuki Katayama, who emphasised the government’s preparedness to implement decisive measures. The dollar index, which measures the U.S. currency against six other units, was at 100.72, indicating a weekly drop of 0.24%. The index reached a one-month low earlier this week due to diminishing prospects for a near-term rate hike; however, safe-haven flows have provided support for the greenback. “The USD remains the highest-yielding safe-haven currency in the G10 complex,” strategists said in a note. “Near-term FX price action is likely to continue reflecting the ‘USD smile’ framework, under which the greenback tends to outperform when markets price either stronger ​U.S. growth and higher rates or a rise in global risk aversion,” they wrote.

Data released on Thursday indicated a modest increase in U.S. retail sales for June, influenced by declining petrol prices that impacted receipts at service stations. However, a notable rise in online spending led to an upward revision of second-quarter growth estimates by economists. The economy’s resilience was highlighted by additional data indicating labour market stability. Economists anticipate that the Federal Reserve will maintain interest rates at their current levels later this month, following data indicating a moderation in consumer price inflation during June. Karen Manna said: “It is far too early to conclude that a renewed disinflation trend has taken hold or that inflation concerns have been fully resolved.” Policymakers remain cautious about placing excessive reliance on a single month of improvement, particularly following a series of months during which inflation has trended unfavourably. Chances for a Fed hike in July stood at 11%, compared to a 25% implied probability the previous week, according to the CME FedWatch tool. Traders are currently factoring in an increase of 26 basis points by December. “I don’t think July is live for rate hikes,” said Tani Fukui. “We expect neither rate hikes nor cuts in 2026.”

In other currencies, the Australian and New Zealand dollars were set to achieve a third consecutive week of gains. The Aussie was 0.24% softer on the day at $0.6981 as risk-off sentiment prevailed. The kiwi was at 0.5838. China’s yuan has depreciated from a one-month peak against the dollar, yet it continues to be poised for its third consecutive week of appreciation. Markets largely dismissed remarks from President Donald Trump, who reiterated allegations of Chinese interference in U.S. elections, a development that may complicate his tenuous agreement with Chinese leader Xi Jinping. Investor attention in the upcoming week will center on the policy decision from the European Central Bank, which is anticipated to maintain interest rates at their current levels, as indicated by a poll. However, a rate hike next month is becoming more probable, according to economists.