The U.S. dollar held near a two-week high against a basket of major currencies on Friday (August 22nd) as investors reduced rate cut bets ahead of Federal Reserve Chairman Jerome Powell's speech at the Jackson Hole symposium.

The euro and the pound touched their weakest levels against the dollar since early August, last holding steady at $1.1160 and $1.3413, respectively. The dollar index edged up 0.1% to 98.72, heading for a 0.9% gain this week to end two straight weeks of declines.

Although indications of a weakening U.S. labor market have bolstered hopes for a reduction in borrowing costs next month, expectations have been dampened by economic data pointing to inflation risks and cautious comments from Fed policymakers. Traders are currently pricing in just under 70% odds of a 25 basis point rate cut in September, down from 75% on Thursday, according to the CME FedWatch tool.

"The dollar has reflected the risk that (Powell) could stick to his guns and become more cautious," said Jane Foley, head of foreign exchange strategy at Rabobank. Fed officials on Thursday appeared less enthusiastic about the idea of ​​a rate cut next month, setting the stage for Powell's speech at 10:00 a.m. EDT (14:00 GMT) at the annual Jackson Hole conference in Wyoming.

Chicago Fed President Austan Goolsbee acknowledged that the upcoming meeting is "immediate" and could bring changes to interest rate policy, although he noted that mixed economic data and unexpectedly high inflation data cast doubt on the prospects for imminent easing. The yield on the 2-year U.S. Treasury bond, which is sensitive to interest rate expectations, edged up to 3.80%, adding to a 5 basis point increase in the previous session. Bond prices move inversely to yields.

Data showed the German economy shrank 0.3% in the second quarter compared to the first quarter as U.S. demand faded after months of accelerated buying in anticipation of U.S. tariffs. "Although financial markets appear to have become numb to tariff announcements, let's not forget that their adverse economic impact will gradually unfold over time," said Carsten Brzeski, global head of macro at ING Research, in a note.

The US tariffs and the euro's stronger exchange rate against a basket of currencies make it difficult to see how the German economy will recover from its "seemingly endless stagnation" in the second half of the year, according to the note. The single currency has strengthened 12% so far this year against the dollar, benefiting from the decline in the US currency.

Analysts at BofA Global Research said that while they see potential for short-term dollar gains ahead of Powell's speech, they maintain an overall bearish outlook amid growing stagflation risks for the US economy.

The yen weakened 0.16% against the dollar, but the 30-year Japanese government bond yield hit a new high and the 10-year yield touched a 17-year high after core inflation data maintained expectations of a Bank of Japan rate hike in the coming months. The Swedish krona and Norwegian krone each fell about 0.2% against the dollar's strength. (alg)

Source: Reuters