Dollar edges higher, but on course for worst week in eight months

Investing.com - The U.S. dollar edged higher in early European hours Friday, rebounding from 15-month lows as traders factored in an end of the Federal Reserve’s rate hike cycle as inflation eases. 

At 02:55 ET (06:55 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 99.620, after having fallen below the 100 level for the first time since April 2022.

Worst weekly dollar performance in eight months

However, despite these gains, the dollar is around 2.5% lower this week, its worst weekly performance in eight months, hurt by the U.S.-reported softer-than-expected inflation data – consumer prices on Wednesday and producer prices on Thursday – supporting views that the Federal Reserve is nearing the end of its interest rate-hiking cycle.

“Over recent months we had been speculating that clear signs of US disinflation - and a weaker dollar - may emerge in 3Q23 and … [these] moves could well be the start of an important market adjustment,” said analysts at ING, in a note.

Markets are still widely expecting a 25 basis point hike from the Fed later this month, but another hike this year is no longer the base case.

Second quarter earnings season next

The second quarter earnings season could also give the Fed food for thought in terms of any additional increases, as executives make statements about current business and consumer demand and their outlook for the remainder of the year.

The major banks are scheduled to start their quarterly reporting season later this session, and traders will be looking for any signs of instability following the turmoil earlier in the spring.

Euro falls back from 16-month high

EUR/USD fell 0.2% to 1.1207, having touched a fresh 16-month peak of 1.1244 in Asian hours before easing.

German wholesale prices fell 2.9% on an annual basis in June, more than expected. This is usually regarded as a leading indicator of consumer price inflation, and the sharp drop will please the European Central Bank given German inflation remains highly elevated.

GBP/USD fell 0.3% to 1.3096, having broken above 1.30 on Thursday for the first time since April 2022, while USD/JPY rose 0.2% to 138.3, with the yen on course for its best week against the dollar since January.

AUD/USD fell 0.3% to 0.6869 amid some uncertainty over monetary policy after the government named Deputy Reserve Bank Governor Michele Bullock as the new central bank governor, the first woman appointed to the role.

USD/CNY fell 0.3% to 7.1303, close to a one-month high following a series of stronger-than-expected midpoint fixes by the People’s Bank of China.