The U.S. dollar rose 0.25% on Friday but was still down about 1% for July as weaker-than-expected U.S. inflation data reduced expectations of another Federal Reserve rate hike this year. Meanwhile, the Japanese yen weakened after the Bank of Japan (BOJ) kept its benchmark interest rate unchanged at 1.0%, according to Reuters.
Dollar Falls for July as Soft Inflation Shifts Fed Outlook
The U.S. Dollar Index (DXY), which measures the greenback against six major currencies, rose around 0.25% during Friday’s session. However, it was still down roughly 1% for July, marking its first monthly decline in several months. Reuters reported that most of the dollar’s losses came after the Federal Reserve kept interest rates unchanged at 3.50%-3.75% and June’s Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, showed inflation cooling.
Headline PCE inflation slowed to 3.7% year-over-year from 4.1% in May, while monthly PCE fell 0.1%, the first monthly decline since April 2020. Core PCE inflation eased to 3.3% year-over-year from 3.4% in May and rose just 0.1% month-over-month, although it remained well above the Fed’s 2% target. The softer-than-expected inflation data strengthened expectations that policymakers could delay another interest-rate hike this year.
According to an official Federal Reserve statement, three Federal Reserve officials continued to support another rate increase, but Fed Chair Kevin Warsh did not provide a clear timeline for additional tightening, leaving investors uncertain about the central bank’s next move.
In Japan, the Bank of Japan kept its benchmark interest rate at 1.0%, a decision that matched market expectations. Reuters reported that the policy board voted 8-1 to maintain rates, with board member Hajime Takata favoring a 25-basis-point increase. The BOJ also reiterated that underlying inflation is expected to remain above its 2% target from early 2027, reinforcing expectations that further policy tightening remains possible later this year.
Elsewhere in currency markets, the euro and British pound each declined around 0.16%, while the Australian dollar traded largely unchanged. The South Korean won weakened significantly, with USD/KRW rising about 1.1% after reversing sharp overnight gains that were also reportedly linked to government intervention. Meanwhile, China’s official Purchasing Managers’ Index (PMI) for July showed both manufacturing and services sectors remained in contraction, weighing on the Chinese yuan, Reuters reported.
The Drivers Behind the Dollar’s Strength and the Yen’s Weakness
The dollar has been supported this year by relatively high U.S. interest rates, while the yen has remained near 40-year lows because of the wide interest-rate gap between the United States and Japan. Japan has repeatedly stepped into currency markets to slow the yen’s decline as higher import costs continue to pressure its economy.
Upcoming Fed and BOJ Catalysts
Investors will now focus on the U.S. July Employment Report, scheduled for August 7, and the July Consumer Price Index (CPI) report due on August 12, for fresh clues on the Federal Reserve’s next policy move. Markets will also watch the Fed’s next policy meeting on September 15-16, while in Japan, investors are monitoring whether the Bank of Japan delivers another 25-basis-point rate hike, with several analysts expecting a move as early as October 2026. Traders will also remain alert for another round of Japanese currency intervention if the yen weakens further beyond the ¥160 per U.S. dollar level.