Synopsis

The dollar tumbled on Friday amidst softening oil prices, hinting at a cease to its prior gains. In contrast, the yen surged following Japan and the US’s reassertion of their commitment to currency stability. Although oil prices linger above $100 a barrel, alleviating some inflationary pressures, Federal Reserve officials raised alarms over ongoing inflation, prompting expectations for more interest rate increases this year.

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The dollar declined on Friday as oil prices eased, but was set for a second straight weekly advance on growing rate hike bets, while the yen rallied after Japan said Tokyo and Washington remain steadfast to the stance behind July's joint intervention.

The dollar was on track to snap a four-day streak of gains as crude prices slumped more than 2%.

Global oil prices have eased as the potential for a truce between the US and Iran outweighed supply concerns from increasing attacks by Houthi fighters against Saudi Arabia. Still they remain above $100 a barrel, preserving upward pressure on inflation.

Comments from central bank officials flagging inflation concerns and support for more rate increases after last week's rate hike of 25 basis points have boosted market expectations for a more aggressive path of monetary policy and helped spark a surge in US Treasury yields.

"We've had a pretty aggressive rally in the dollar over the last couple of days and maybe it's a little stretched, just taking a little breather. So I wouldn't really say that the dollar is really weakening materially today," said Eugene Epstein, head of trading and structured products at Moneycorp in Stamford, Connecticut.

"It's just a combination of those factors that you have not only a slight increase in odds of a second hike before year-end, but also just general bond yields going up and the market getting a bit concerned about that, so that's really what we have, what's been driving the dollar stronger overall."

The dollar index, which measures the dollar against five other currencies, fell 0.3% and was on track for its biggest daily percentage drop in about three weeks, to 100.95. The euro was up 0.15% at $1.1396 but on pace for a third straight weekly decline, its longest run since the start of the year.

Expectations for a rate hike from the Fed at its October meeting stood at about 66%, according to CME FedWatch, up from about 58% a week earlier.

Federal Reserve Bank of Cleveland President Beth Hammack said on Friday that she is increasingly worried that inflation that has overshot the central bank's 2% target for years will cause the public to lose confidence that price pressures will return to target.

On the data front, new orders for US-manufactured capital goods increased more than expected in August and data for the prior month was revised sharply higher, pointing to another quarter of robust growth in business spending as artificial intelligence infrastructure is created.

In a separate report, the University of Michigan's Surveys of Consumers said its Consumer Sentiment Index ticked up to 48.1 from the prior reading of 47.8, above the 47.6 estimate of economists polled by Reuters.

Sterling strengthened 0.23% to $1.3246, supported by hawkish comments from Bank of England Governor Andrew Bailey. Yet it remained close to a three-month low hit on Thursday.

The Japanese yen strengthened 1.06%, on pace to snap a four-day streak of declines and its biggest daily gain against the dollar since September 7, to 157.13.

The currency rose after Japan's Finance Minister Satsuki Katayama said US President Donald Trump raised concern about yen weakness during a summit with Japanese Prime Minister Sanae Takaichi earlier this week.

Katayama and US Treasury Secretary Scott Bessent held a call on Friday, reaffirming that yen undervaluation is a matter of concern and that the two nations intend to strengthen cooperation, Japan's Finance Ministry said in a statement.

Still, the yen was on track for a second weekly fall, after markets judged the Bank of Japan's rate hike last week to a 31-year high and its latest guidance as insufficiently hawkish.

Elsewhere, the dollar strengthened 0.11% to 6.723 versus the offshore Chinese yuan, as a Trump-Xi summit in Washington ended that showcased personal diplomacy rather than big breakthroughs in economic relations.

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