Dollar Rally Pauses on Friday

The dollar index fell below 101 on Friday, pausing a five-session rally that had taken the greenback to July highs. A modest decline in oil prices, amid signs that US and Iranian negotiators may be exploring a phased agreement to reopen the Strait of Hormuz, provided some relief to investors concerned about inflationary pressures. Nevertheless, the dollar gained around 1% on the week, marking a second consecutive week of gains. The move was supported by expectations of further monetary policy tightening by the Fed, continued uncertainty in the Middle East, the sequential rise in oil prices, and resilient US economic activity. The greenback was mostly lower against the yen on Friday after Japanese authorities said Tokyo and Washington remain committed to the stance underpinning July’s joint interventions. Finance Minister Katayama also said that President Trump had expressed concerns about the yen during a meeting with Prime Minister Sanae Takaichi earlier this week.

The dollar index held above 101 on Friday after rising for four straight sessions, trading at its strongest levels in nearly two months and on track to advance for the second consecutive week. The greenback strengthened as elevated oil prices and robust US economic data stoked inflation concerns, reinforcing expectations that the Fed may tighten policy further. Markets are currently pricing in roughly a 67% probability of a Fed rate hike in October, following last week's increase. New York Fed's John Williams said the central bank still has a lot of work to do to bring inflation under control, while Philadelphia Fed's Anna Paulson said some modest additional policy tightening could be warranted. On the data front, US weekly initial jobless claims unexpectedly fell by 1,000 to a two-month low of 197,000, pointing to continued labor-market resilience. Investors now await consumer sentiment and durable goods data on Friday for further clues about the economy.

The dollar index extended its gains for a fourth consecutive session, rising to 101.2 on Thursday, its longest winning streak since May and keeping it near July highs. The dollar has been supported by expectations of further Fed tightening. Oil prices also moved higher amid elevated tensions between the US and Iran, while talks on the sidelines of the UN General Assembly have made little progress toward ending the conflict. Higher energy prices are likely to add further pressure on inflation, particularly as US diesel prices hit a new record high. Against this backdrop, traders have increased their bets on further Fed tightening this year. Markets are now pricing in nearly a 64% chance of another 25 bps rate hike in October. Recent comments from several Fed officials have also been perceived as hawkish. Meanwhile, the dollar strengthened against the Swiss franc after the Swiss National Bank left interest rates unchanged at 0%. The Japanese yen also weakened to three-week lows.