Dollar set for another positive week on raised Fed hike expectations

Investing.com - The U.S. dollar edged lower in early European trading Friday but was on course for its third consecutive weekly gain as U.S. rate hike expectations grow.

At 03:15 ET (07:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.1% to 104.040, just below Thursday's two-month high of 104.31.

Despite Friday’s minor losses, the U.S. currency is still on course for a weekly gain, its third in a row, of just under 1% as traders position for the potential that U.S. interest rates remain higher for longer.

Data released on Thursday showed that the number of Americans filing new claims for unemployment benefits increased only moderately last week to 229,000, while first-quarter GDP growth was revised higher to 1.3%, from 1.1%.

Attention Friday is going to be on the release of the personal consumption expenditure index, a closely watched barometer of inflation, which the Federal Reserve will be closely watching as it heads into its June policy meeting.

With inflation proving sticky, expectations are now rising that the Fed will raise rates again in June, with futures traders almost evenly split between expecting a rate hike and a pause.

The dollar has also received a boost this week, given its safe haven status, from the lack of success in reaching a deal to lift the U.S. government's $31.4 trillion debt ceiling, with the early-June deadline drawing nearer.

The two sides appear to be closing in on a deal, Reuters reported late Thursday, but any agreement would have to pass the Republican-controlled House of Representatives and the Democratic-controlled Senate.

Elsewhere, EUR/USD edged higher to 1.0731, remaining close to a two-month low, even as European Central Bank officials hint at further interest rate hikes to tame still elevated inflation.

“In order to banish the specter of inflation, we in the Eurosystem have acted resolutely,” Bundesbank President Joachim Nagel said Thursday. “The ECB Governing Council will continue on this monetary-tightening path to overcome high inflation.”

GBP/USD rose 0.2% to 1.2344 after British retail sales rose by more than expected in April, rising by 0.5% from March, above the 0.3% expected and an improvement from the drop of 1.2% the prior month.

With U.K. inflation remaining the highest in the G7, jointly with Italy, and consumer spending showing a degree of resilience, the Bank of England is likely to hike interest rates once more next month.

USD/JPY edged 0.2% lower to 139.78, just off a six-month high, with softer-than-expected Tokyo inflation data on Friday lifting expectations that the Bank of Japan will hold off on tightening policy this year.

AUD/USD rose 0.3% to 0.6522, while USD/CNY fell 0.4% to 7.0524, rebounding from a near six-month high, but remains well above the key 7 level.