Investing.com - The U.S. dollar retreated Friday, as benign inflation data pointed to more interest rate cuts by the Federal Reserve by the end of the year.
At 04:20 ET (08:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.2% to 100.545, though it was still on track for a slight weekly gain thanks to its sharp rise on Monday.
Dollar slips on weak data
The gains at the start of the week were propelled by a U.S.-China trade truce, which boosted the dollar on hopes that a potentially economically damaging trade war had been averted.
However, further gains have been harder to come by as recent data has pointed to a slowing economy, something the Federal Reserve will likely have to address in time.
U.S. data released on Thursday showed soft retail sales as well as producer prices unexpectedly falling in April. The PPI figures came on the heels of a tame consumer price reading earlier in the week, cementing bets that the Fed is likely to cut rates at least twice this year.
As far as Friday’s data is concerned, housing starts are expected to have increased in April, while import prices should have dropped on the back of lower oil prices, ahead of the University of Michigan sentiment survey.
“This week’s price action suggests waning momentum for the dollar to close its lingering risk premium,” said analysts at ING, in a note. “The risks remain skewed to the downside for DXY [the dollar index] as strategic dollar shorts remain prevalent, and the 100.0 support could be retested sooner rather than later.“
Euro gains, for now
In Europe, EUR/USD traded 0.2% higher to 1.1211, benefiting from the weakness of the dollar.
“We still see 1.120 as a good short-term anchor for EUR/USD, although the bias seems to be for testing 1.130 rather than 1.110 in the short term on the back of lingering USD strategic selling,” said ING.
That said, the euro could struggle later in the year, with Barclays still expecting a technical eurozone recession in the second half of 2025, even after the U.S.-China trade deal.
"Overall, we remain downbeat about the growth outlook in the euro area because uncertainty remains very elevated and the negotiations on reciprocal tariffs between the European Union and the U.S. remain at a technical level and there are no signs of progress," Barclays said in a note.
GBP/USD rose 0.1% to 1.3314, helped by data, released on Thursday, showing that Britain’s economy grew more strongly than expected in the first quarter of 2025.
“Next Monday sees the U.K.-EU summit, the first since Brexit. More discussion about U.K.-EU alignment should help the pound,” said ING
Yen falls on weak growth data
In Asia, USD/JPY traded 0.3% lower to 145.29, after data showed that Japan’s economy contracted more than expected in the first quarter of 2025, shrinking at an annualized rate of 0.7%, marking its first decline in a year.
The contraction exceeded the anticipated 0.2% decline and was driven by a 0.6% drop in exports and flat consumer spending, reflecting the impact of U.S. tariffs and global trade uncertainties.
USD/CNY traded 0.1% lower to 7.2029, in muted trading.