Forex Report: Dollar Eases but Heads for Weekly Gain Amid Cooling Trade Tensions and Cautious Fed

The U.S. dollar slipped slightly in early European hours on Friday, though it remained on track for a modest weekly gain, supported by lessened trade tensions and expectations that the Federal Reserve will hold off on cutting interest rates in the near term.

At 04:30 ET (08:30 GMT), the U.S. Dollar Index — which tracks the greenback against six major currencies — fell 0.2% to 100.275, though it is still set to end the week with a gain of around 0.4%.

Fed Holds Steady, Traders Push Back Rate Cut Bets

The Federal Reserve left its benchmark interest rate unchanged at 4.25%-4.50% during its latest policy meeting on Wednesday, as widely anticipated. However, Fed Chair Jerome Powell’s cautious tone, particularly around ongoing economic uncertainty and inflation risks, led traders to temper their expectations for a rate cut in June.

Market-based odds for a June cut dropped to 17%, down sharply from 55% just a week ago, giving the dollar a boost throughout the latter half of the week.

Dollar Supported by U.S.-U.K. Trade Deal

News of a U.S.-U.K. trade agreement also underpinned sentiment toward the greenback. The framework deal modestly increases agricultural access and lowers some tariffs, including on British car exports, while maintaining a 10% baseline duty on many other goods.

Traders are now focused on U.S.-China trade talks set to begin over the weekend in Geneva, with hopes that they may pave the way for further easing of global trade tensions.

Euro and Pound Stabilize After Weak Start

The euro recovered from overnight lows, with EUR/USD rising 0.2% to 1.1251. However, upside in the single currency may be capped as investors favor the dollar amid easing trade risks and diverging monetary outlooks.

Finnish central bank governor Olli Rehn warned that while eurozone inflation is cooling towards the European Central Bank’s 2% target, deteriorating global growth — exacerbated by trade conflict — poses a significant risk.

GBP/USD also inched higher, up 0.1% to 1.3259, rebounding from a three-week low hit after the U.K. trade deal announcement failed to spark lasting enthusiasm. The Bank of England cut rates by 25 basis points to 4.25% on Thursday, as expected, citing easing inflation pressures and slower domestic growth.

Yen Rises Slightly, Yuan Remains Under Pressure

In Asia, the Japanese yen posted a modest gain, with USD/JPY down 0.4% to 145.24. Despite the move, the pair remains near a one-month high, with weak wage data undermining the Bank of Japan’s case for further policy tightening.

The Chinese yuan slipped, with USD/CNY up 0.2% to 7.2464. Chinese trade data showed a better-than-expected rise in exports and resilient import levels, but the currency failed to benefit significantly ahead of high-stakes weekend trade talks with the U.S.

The dollar looks poised to end the week with moderate gains as traders dial back expectations for near-term Fed easing and keep watch on geopolitical developments. Any progress from the U.S.-China talks could further support risk appetite and influence currency flows going into next week.