The dollar inched off two-week lows on Friday, but kept on track for its biggest weekly drop in a month, as investors contended with U.S. tariff negotiations before an August 1 deadline, while looking ahead to central bank meetings next week.

Both the U.S. Federal Reserve and the Bank of Japan are expected to hold rates at next week's policy meetings, but traders are focusing on the subsequent comments to gauge the timing of the next move.

"Next week's BOJ policy meeting will be closely watched for hints on the timing of the next rate hike," said Carol Kong, currency strategist at Commonwealth Bank of Australia (OTC:CMWAY).

The prospect of rate hikes by the BOJ had improved, she added, after a trade deal struck with the United States this week lowered tariffs to 15% on auto imports from Japan.

But a near-term rate hike is hardly a done deal with the timing dependent on whether the economy can withstand the impact of U.S. tariffs, four sources familiar with the BOJ's thinking told Reuters.

The yen stood at 147.20 to the dollar, on course for a weekly gain of nearly 1%, although the currency was weaker on the day as investors weighed monetary policy outlook and the fate of embattled Japanese Prime Minister Shigeru Ishiba.

A majority of economists in a Reuters poll this week said they expect Japan's central bank to raise interest rates by 25 basis points this year.

The dollar index, which measures the U.S. currency against six other units, was at 97.448, set for a drop of 1% this week, its weakest performance in a month. 

On Thursday, the European Central Bank left its policy rate at 2%, as expected, in a break from a year of policy easing, to await clarity over future U.S. trade ties after the European Commission said a negotiated solution was in reach ahead of the August 1 deadline.

The euro was little changed at $1.174, but not far from $1.183, the near four-year high it touched at the start of the month. The euro is up 13.5% this year as tariff policies take the shine off the dollar.

Progress on trade deals has also raised market hopes for talks with China, after U.S. Treasury Secretary Scott Bessent said officials of both countries would meet in Stockholm next week to discuss an extension of the deal negotiation deadline.

The Australian dollar has been boosted by the rise in risk appetite after the trade deals and was last at $0.6593, hovering near an eight-month high touched on Thursday.

Source: Investing.com