The U.S. dollar edged slightly higher on Friday, pausing its recent slide as investors digested a combination of softer labor data and a modest uptick in inflation, while rate cut bets from the Federal Reserve remained firmly in place.

Dollar Index and Treasury Yields

The dollar index rose 0.1% to 97.66, trimming part of Thursday’s losses but still heading for a 0.1% weekly decline—its second in a row. The move came as Treasury yields recovered from earlier weakness, with the 10-year note rising 4 bps to 4.04%, after briefly slipping below 4% for the first time since April.

Labor Market and Inflation in Focus

Weekly jobless claims surged to their highest level in nearly four years, highlighting renewed weakness in the labor market. That overshadowed consumer price index data showing August inflation rising 0.4% month-on-month and 2.9% year-on-year, the sharpest increase in seven months but still broadly aligned with forecasts.

Investors now overwhelmingly expect the Fed to cut interest rates by 25 basis points at its September 17 meeting. Odds of a larger 50 bps move have eased, with traders anticipating a more gradual easing cycle heading into 2026, according to CME FedWatch data.

Euro, Sterling, and Yen

The euro slipped 0.1% to $1.1725, consolidating after Thursday’s gain. The European Central Bank kept its key rate at 2% for a second meeting, with policymakers signaling comfort in holding steady as inflation trends remain aligned with target.

The British pound weakened 0.2% to $1.3553, weighed down by data showing that U.K. GDP flatlined in July, signaling a summer slowdown.

Against the Japanese yen, the dollar gained 0.4% to 147.76 after the U.S. and Japan reaffirmed their commitment to market-driven exchange rates and the need to avoid “excess volatility.”

Yuan and Australian Dollar

The offshore yuan weakened 0.1% to 7.1234 per dollar, while the Australian dollar slipped marginally to $0.6645, though it remained close to a 10-month high amid steady commodity demand.

With labor market data weakening and inflation holding modestly above the Fed’s 2% target, investor focus is firmly on next week’s Federal Reserve policy meeting. A quarter-point cut is seen as a near-certainty, while the debate now turns to whether the Fed will adopt a more aggressive easing path into year-end.