The US dollar index is heading for its largest weekly decline in a month as investors brace for sensitive trade negotiations and central bank meetings next week. Meanwhile, the British pound fell following weaker-than-expected UK retail sales data.
Markets widely expect both the Federal Reserve and the Bank of Japan to leave interest rates unchanged in their upcoming policy meetings. However, attention will be focused on post-meeting statements to gauge the timing of any future policy shifts.
Politics are also playing a key role, particularly in the US, where President Donald Trump renewed his pressure on the Fed to lower rates during a Thursday visit to the central bank—a move seen as an escalation in his public feud with Fed Chair Jerome Powell.
Nevertheless, the dollar managed a modest rebound against the euro late Thursday after Trump said he had no intention of firing Powell—a threat he had previously hinted at multiple times.
Derek Halpenny, Head of Research for EMEA at MUFG, said: “The market took comfort in Trump not calling for Powell’s removal, although it was based on his belief that Powell would do ‘the right thing.’” He added, “The Fed’s independence, being undermined by the White House, remains a lingering concern and a downside risk for the dollar.”
Dollar Pressured by Euro and Yen Gains
Losses against the euro and yen weighed on the US Dollar Index, which measures the greenback’s performance against six major peers. The index dropped to 97.45, down roughly 1% for the week—its worst weekly showing in a month—though it did edge up 0.15% on Friday.
Yen Gains Despite Political Uncertainty
In Japan, although this week’s trade deal with the US could give the Bank of Japan more room to raise interest rates, the ruling party’s defeat in Sunday’s upper house elections complicates the outlook for monetary policy.
Expectations of increased government spending could fuel inflation, boosting the case for tighter policy. However, prolonged political gridlock and renewed global trade tensions argue for a more cautious stance.
The yen stood at 147.20 per dollar and is set to post a weekly gain of nearly 1%, despite Friday’s daily decline as investors reassessed the policy outlook and the future of Prime Minister Shigeru Ishiba’s administration.
Euro Set for Weekly Gain Versus Pound and Dollar
The euro rose slightly to $1.1756, heading for a weekly gain of about 1% as well. It was supported on Thursday by the European Central Bank’s decision to hold interest rates steady at 2%, as expected, while delivering a relatively upbeat tone on the economic outlook.
Hopes for a trade deal between the EU and the US also helped temper prior expectations of further rate cuts later this year.
Paul Hollingsworth, Head of Developed Markets Economics at BNP Paribas Markets 360, said: “While worsening trade conditions or a sharp fall in inflation might prompt further easing, the ECB appears inclined to hold policy steady. We believe the easing cycle is now complete.”
Weak UK Data Supports Euro Against Sterling
On the flip side, weak UK data has raised expectations for more rate cuts from the Bank of England. This is causing eurozone bond yields to rise faster than their UK counterparts, boosting the euro against the pound.
The euro rose 0.23% versus the pound to 87.26 pence, its highest level since April, after gaining 0.44% the previous day.
Friday’s data showed that UK retail sales for June missed expectations, despite recovering from a steep drop in May. Thursday’s figures also revealed weak July business activity and the fastest job cuts in five months.
The pound fell 0.3% against the dollar to $1.3471.
