The U.S. dollar hovered near a one-month low on Thursday, as soft inflation data reinforced bets that the Federal Reserve can stay patient on interest rate hikes, while escalation in Middle East hostilities added upside risk to the inflation outlook.
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The dollar edged higher against major peers on Thursday while remaining near a one-month low, reflecting expectations that the U.S. economy will remain resilient, the Federal Reserve will hold rates steady this month and oil price swings may calm.
U.S. unemployment benefits filings fell last week, suggesting continued labor market stability, while U.S. retail sales increased marginally in June as lower gasoline prices weighed on receipts at service stations.
The U.S. economy is less exposed to energy shocks than many of its peers, helping attract safe-haven flows into the dollar when oil prices rise, often at the expense of the euro and yen.
Fed hike chances fade
“We have received two cooler than expected inflation reports this week, which should allow the Fed to punt on any potential rate hikes for now, which should weigh on the dollar,” said Tim Holland, chief investment officer at Orion.
“If things settle down in the Middle East and oil retraces its recent pop, we think talks of a Fed rate hike will fade and talk of peak inflation will pick up.”
The U.S. dollar index , which tracks the currency against six peers, rose 0.29% to 100.77, hovering near its lowest since June 18 and on track for a weekly decline.
Chances for a Fed hike in July were 10%, versus a 45% implied probability at the start of the week. Markets still see even odds of at least a 25 basis-point increase in September, according to Fed funds futures prices via CME Group.
ECB rate path in focus
The euro slipped 0.23% to $1.1436. Investors are closely monitoring European gas futures, which have risen to their highest levels since March, stoking concerns that higher energy costs could weigh on the euro zone economy and limit further appreciation of the euro.
The European Central Bank is seen as more hawkish than the Fed, with markets betting on two additional rate hikes into 2027 and some economists not ruling out a first move next week.
“Some ECB officials might actually be inclined to push more forcefully for another rate hike,” Carsten Brzeski, global head of macro at ING, said, after mentioning the renewed escalation in the Middle East.
Sterling held near a two-month high at $1.3467, last down 0.53% after economic data, with investors expecting that Britain’s incoming prime minister will pick a fiscally conservative finance minister.
Yen under the spotlight
The yen hovered near multi-decade lows, with attention on potential moves by Japan’s Government Pension Investment Fund after Finance Minister Katsunobu Kato said last week the government wants a “substantial” increase in domestic asset investment.
Analysts said the GPIF has the greatest capacity among Japanese investors to influence the forex market. GPIF conducts a strategy review every five years and completed its latest one in 2025. However, it can still adjust its holdings within its target allocation bands.
“Markets had a busy start of the week, with encouragingly benign CPI and PPI prints, Kevin Warsh’s testimony to Congress, and the resumption of hostilities in the Middle East,” said John Velis, Americas Macro Strategist at BNY. “It seems as if FX and fixed income markets are taking a breather after all that news.”
