Dollar Heads for Weekly Decline as Rate Hike Bets Plummet

The US dollar is poised to end the week on a decline after traders reduced expectations of near-term Federal Reserve interest rate hikes following softer-than-expected US inflation data. The dollar index, which measures the greenback against six major currencies, stood at 100.72 and was set for a 0.24% weekly decline.

The index touched a one-month low earlier in the week as markets lowered expectations of an immediate rate increase, although renewed tensions between the United States and Iran provided some support through safe-haven demand. The two countries have exchanged intensifying strikes over the past week, weakening confidence after a truce last month and pushing oil prices to near one-month highs.

Despite this, sterling rose to US$1.3476, marking its third consecutive week of gains as concerns over the United Kingdom's fiscal outlook eased. OCBC strategists noted that 'the USD remains the highest-yielding safe-haven currency in the G10 complex', and added that near-term FX price action is likely to continue reflecting the 'USD smile' framework.

Markets now see an 11% chance of a Fed rate hike in July, down from 25% last week, according to the CME FedWatch tool. Traders are pricing in 26 basis points of rate increases by December, compared with 44 basis points earlier this week.