The US Dollar (USD) experienced broad-based weakness against major currencies during Asian trading hours on Friday, as market participants responded to diverging central bank outlooks, geopolitical tensions, and shifting expectations for US monetary policy. The British Pound (GBP) edged higher to near 1.3645, supported by fading Federal Reserve (Fed) rate hike expectations and anticipation of the UK Retail Sales data for July, which economists project to decline by 0.5% month-on-month, compared to a 1.0% drop in June [1]. Market pricing via the CME FedWatch Tool indicated a 64% probability that the Fed would keep rates unchanged in September and a 36% chance of a hike [1]. Meanwhile, the Bank of England (BoE) is expected by a strong majority of economists polled by Reuters to leave interest rates unchanged at 3.75% for the remainder of the year, as recent inflation and labor market data have cooled expectations for further tightening [1].
The Canadian Dollar (CAD) outperformed, with USD/CAD extending losses for a third consecutive day to around 1.3770, driven by rising crude oil prices amid escalating US-Iran tensions over the Strait of Hormuz [2]. President Donald Trump announced plans for severe economic restrictions on Iran, described as an 'economic D-day,' with formal details expected on Monday [2][3]. US Treasury Secretary Scott Bessent stated that maximum economic pressure on Iran would likely reduce the need for military intervention [2]. Strategists at Scotiabank highlighted that the CAD's 0.3% rise was second only to the New Zealand Dollar (NZD) among major currencies, supported by broad USD weakness and progress on US-Canada trade [2].
The New Zealand Dollar (NZD) climbed to its highest level since early June, trading around 0.5965-0.5970, as expectations for another Reserve Bank of New Zealand (RBNZ) rate hike and receding Fed hike bets buoyed the currency [3]. Despite New Zealand recording a monthly trade deficit of NZ$1.95 billion in July, the NZD remained the strongest major currency against the USD this week, appreciating by 1.24% [3]. Geopolitical risks, particularly the US-Iran standoff, and hawkish FOMC Minutes kept the door open for further US policy tightening, but did not prevent the NZD's advance [3].
The Euro (EUR) also gained for a third straight day, trading around 1.1680, supported by a hawkish European Central Bank (ECB) outlook and robust German economic data, including July producer prices rising 3.0% year-on-year, surpassing expectations [4]. Elevated European natural gas prices due to Middle East supply shortages contributed to persistent inflationary pressures, reinforcing expectations for further ECB rate hikes [4]. However, the upside for EUR/USD may be limited as US Treasury yields resumed their upward trajectory, providing some support to the Dollar [4].
Across the board, Fed’s Musalem delivered a speech emphasizing inflation risks and the potential need for pre-emptive rate hikes, though he avoided explicit guidance ahead of the September FOMC meeting [1][4]. The FXS Fed Sentiment Index slipped by 0.34 points to 132.42, indicating a slight pullback in hawkishness but remaining well above the neutral line, reflecting ongoing market concerns about persistent US inflation [1][4].
CONCLUSION
Major currencies including the GBP, CAD, NZD, and EUR strengthened against the US Dollar, driven by diverging central bank expectations, robust regional data, and geopolitical developments. Despite some hawkish signals from the Fed, market sentiment remains cautious, with traders closely watching upcoming economic releases and central bank actions for further direction. The overall market impact is high, as shifting rate expectations and geopolitical risks continue to drive volatility in currency markets.