(Reuters) – The dollar weakened slightly on Friday but remained on track for a weekly gain after soft U.S. inflation data further dampened expectations of a near-term Federal Reserve interest rate hike. Currency movements were largely subdued, constrained by ongoing tensions in the Middle East and high oil prices.
The U.S. Dollar Index dipped 0.1% to 99.82, following a slight decline in the previous session.
Soft U.S. PPI Data Dampens Fed Rate Hike Expectations
Data released on Thursday showed that U.S. producer prices remained unexpectedly flat in July, adding to evidence that inflationary pressures are easing. This followed a consumer price report showing the headline CPI rose 3.4% year-on-year in July, while core CPI slowed to 2.5%.
Markets now price in only a roughly 35% chance of a Fed rate hike at the September meeting—down from 55% a week earlier—according to CME FedWatch data. This shift in rate expectations provided some support for risk-sensitive Asian currencies, though gains remained limited as investors continued to monitor developments in the Middle East.
U.S. Defense Secretary Pete Hegseth said on Thursday that the U.S. military could maintain a naval blockade of Iranian ports indefinitely. The move is part of President Donald Trump’s strategy to keep economic pressure on Tehran amid stalled peace negotiations. This escalation comes as shipping through the Strait of Hormuz—a critical artery for global oil and liquefied natural gas (LNG) supplies—remains severely disrupted. Oil prices posted a 4% weekly gain, fueling inflation concerns and capping the potential boost Asian currencies might have otherwise received from the softer U.S. data.
Yen Set for 1% Weekly Decline
The Japanese yen (USD/JPY) edged down 0.2% to the 159.20 level but remained on track for a 1% weekly gain. The currency has relinquished some of the gains achieved following joint US-Japan interventions in late July and early August. Traders are increasingly wary of potential further intervention should the yen breach the 160-per-dollar mark.
Expectations for a Bank of Japan (BOJ) rate hike in September have also risen sharply; however, analysts note that a sufficiently hawkish stance from the BOJ is required to provide sustained support for the yen. Meanwhile, the Chinese yuan (USD/CNY) traded steadily, while the Australian dollar (AUD/USD) rose slightly by 0.2%.
