US Dollar Corrects from 13-Month High
The US dollar weakened in trading on Friday (June 26th) after previously touching a 13-month high. This weakening occurred as investors began to take a breather following the greenback's strong rally, although persistently high inflation, expectations of prolonged high interest rates, and geopolitical tensions continued to support demand for the dollar.
The US dollar index fell around 0.35% after previously reaching its highest level in more than a year. Despite the correction, the dollar remains relatively strong as markets continue to view the Federal Reserve as having little room to ease policy. US inflation remains well above its 2% target, while Fed officials continue to signal caution regarding price pressures.
The dollar's primary support comes from expectations that US interest rates will remain high for longer. After inflation data showed persistent price pressures, macro investors again increased bets on the possibility of monetary tightening. CME FedWatch shows the probability of a 25 basis point interest rate hike at the September meeting is around 64%.
This condition keeps the dollar attractive in global markets. The wide interest rate differential between the United States and other countries has driven yield-seeking capital back into dollar-based assets. Thus, the greenback not only acts as a safe haven asset but also offers the attraction of higher yields compared to many other major currencies.
The euro managed to alleviate some of the pressure and moved back near US$1.14. The euro's rise occurred in line with the dollar's technical correction and end-of-month flows. However, the euro's room for strengthening remains limited as the divergent policy outlooks between the Fed and other major central banks remain favorable to the dollar.
The Japanese yen remains under severe pressure. USD/JPY is trading around 161.63, not far from its peak of 161.95, the yen's weakest level since 1986. This position keeps speculation of intervention by Japanese authorities alive, especially as a weaker yen could increase import costs and add to domestic inflationary pressures.
Tokyo inflation data showed core CPI rose 1.6% year-on-year in June, in line with market expectations. Meanwhile, a measure of inflation excluding fresh food and energy rose 1.1%. While indicating persistent price pressures, the data is not yet strong enough to prompt the Bank of Japan to aggressively accelerate policy tightening.
Meanwhile, the Australian dollar and New Zealand dollar continued to weaken against the US dollar. AUD/USD fell around 0.2%, while NZD/USD weakened slightly. The Australian dollar remained under pressure despite strong domestic inflation and employment data, as global investors continued to prefer the US dollar amid expectations of the Fed's high interest rates.
The pound sterling also gained attention after UK household inflation expectations fell in line with weakening oil prices. This gave the Bank of England room to be less aggressive in raising interest rates. However, a decline in UK inflation expectations could also limit the pound's appeal against the US dollar.
Broadly, the foreign exchange market remains fragile. A decline in technology stocks due to concerns about chip costs and artificial intelligence infrastructure weighed on risk sentiment. Typically, pressure on growth stocks would drive investors into government bonds, but this time the threat of structural inflation and geopolitical risks made the bond market less secure.
Tensions in the Strait of Hormuz added to market complexity. Drone attacks on commercial tankers had sparked renewed concerns about energy supplies. However, oil prices subsequently weakened as shipping continued to flow through the route, leaving the market still weighing geopolitical risks and supply normalization.
Given these conditions, the dollar's weakening on Friday appears more like a technical correction after a strong rally, rather than a major trend change. As long as US inflation remains high, the Fed maintains a hawkish stance, and yield spreads remain favorable to the dollar, the greenback still has the potential to become the dominant currency in global markets in the second half of 2026. (arl)
Source: Newsmaker.id
