The U.S. dollar edged marginally higher Friday ahead of the release of key inflation data, but remained close to multi-year lows, on course for hefty weekly losses on expectations of lower interest rates and reduced geopolitical and trade tensions.

At 04:45 ET (08:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose marginally to 96.770, remaining close to its lowest level since March 2022, on track for a 1.5% decline in June, its sixth straight month in the red.

Dollar has further downside

Signs of stabilization in the Middle East, with the ceasefire between Israel and Iran appearing to hold, has seen the safe-haven dollar lose demand.

Trade uncertainties also appear to be lifting, with U.S. Commerce Secretary Howard Lutnick stated on Thursday that China and the U.S. have finalized a trade understanding that was initially reached in Geneva last month, although he did not provide specific details about the contents of the agreement.

Lutnick also reiterated that the U.S. is close to finalizing a trade deal with India, while the Wall Street Journal reported that the European Union is considering cutting tariffs on a range of U.S. imports in a bid to strike a swift trade agreement with President Donald Trump.

With this in mind, traders are turning their attention back towards the health of the U.S. economy and the likelihood of future interest rate cuts.

Fed Chair Jerome Powell maintained his cautious stance regarding interest rate reductions at his semi-annual testimony to Congress earlier this week, a move which drew further criticism from Trump.

The U.S. president suggested he could soon announce Powell's replacement, and the prospect of the next Federal Reserve chair being more dovish has raised the odds of the central bank cutting rates.

Traders are now pricing in 64 basis points of easing this year versus 46 bps expected last week.

This could change with the release of the core PCE price index later in the session, which is likely to offer additional clues on the Fed's rate trajectory.

"The balance of risks for the dollar remains tilted to the downside, with multiple factors – Fed, data, spending bill, tariffs – all carrying the potential to trigger another downward adjustment in the dollar," said analysts at ING, in a note.

European inflation data

In Europe, EUR/USD gained 0.2% to 1.1715, after climbing to its highest since September 2021.

French consumer prices rose more than expected in June, ending a streak of declining inflation, with its harmonised inflation rate, adjusted for comparison with other eurozone countries, coming in at 0.8% year-on-year in June, up from 0.6% in May, which was the lowest since December 2020.

Spain's European Union-harmonised 12-month inflation rate also inched up in June, to 2.2%, from 2.0% a month earlier.

"Markets will likely wait until Monday's German numbers are published to draw any conclusions for the European Central Bank," said ING. "1.20 is within reach for EUR/USD, but it's mostly U.S. factors that hold the key to the next move."

GBP/USD climbed 0.1% to 1.3743, just below the October 2021 high of 1.37701 touched on Thursday.

Yen eases higher

In Asia, USD/JPY traded 0.1% lower to 144.32, only marginally changed even as Tokyo consumer inflation data read softer than expected for June, heralding a potential decline in national inflation.

Softer inflation raises some doubts over whether the Bank of Japan has enough headroom to keep raising interest rates.

USD/CNY gained marginally to 7.1694, barely reacting after U.S. Commerce Secretary Howard Lutnick said on Thursday that Washington had reached a trade deal with China, although he did not divulge any clear details on the purported agreement. 

Source: Investing.com