Dollar edges lower but poised for weekly gain as early rate cut hopes dim

The U.S. dollar edged lower on Friday, pausing after five straight sessions of gains but still poised for a weekly climb, as recent economic data and comments from Federal Reserve officials dampened expectations of rapid cuts in interest rates.

The greenback strengthened early in the session after economic data showed the University of Michigan's preliminary reading on the overall index of consumer sentiment came in at 78.8 this month, the highest reading since July 2021, compared with 69.7 in December and the 70.0 estimate of economists polled by Reuters.

The data comes on the heels of solid labor market and retail sales data earlier this week indicating the economy remained firm.

Expectations for a cut from the Fed in March of at least 25 basis points (bps) have dipped below 50 per cent according to CME's FedWatch Tool with traders now targeting May as the likely month for a rate cut announcement.

"The market is refusing to give up, it is pushing its ideas into the future, but it hasn't changed its ideas," said Joseph Trevisani, senior analyst at FXStreet in New York.

"The Fed is going to start lowering rates and the reason they're going to start lowering rates is the economy is going to get weaker - this has been the mantra ever since the Fed pretty much started raising rates."

The dollar index , which tracks the greenback against a basket of six currencies, was down 0.08 per cent at 103.26, on pace to snap a five-session win streak, but was up 0.8 per cent on the week.

A steady stream of Fed officials, starting with Governor Christopher Waller on Tuesday, have pushed back on market expectations the central bank will embark on a path of fast reductions to interest rates. Waller said the Fed should proceed "methodically and carefully" until it is clear lower inflation will be sustained.

On Friday, Chicago Fed President Austan Goolsbee said weeks more of inflation data need to be in hand before any decision could be made to cut interest rates.

In addition, Federal Reserve Bank of San Francisco President Mary Daly said there is still a lot of work left to do on inflation and it is premature to think rate cuts are around the corner.

The euro was up 0.16 per cent at $1.0891 against the dollar but is down about 0.5 per cent for the week. J.P.Morgan on Friday pulled forward its expectations for the start of interest-rate cuts by the European Central Bank to June from September, but said it remained "cautious" about inflation and wage growth trends.

The yen was flat versus the greenback at 148.15. The Bank of Japan is scheduled to hold a policy meeting next Monday and Tuesday, and is likely to maintain its ultra-loose monetary settings. The dollar is up more than 2 per cent against the Japanese currency this week and on track for its third straight weekly gain.

Earlier data showed Japan's core inflation rate slowed to 2.3 per cent in the year to December, its lowest annual pace since June 2022, taking the pressure off policymakers to make swift moves.

Sterling was last trading at $1.27, down 0.06 per cent on the day after weakening to $1.2662 following data which showed UK retail sales slumped by the most in three years in December.

In cryptocurrencies, bitcoin gained 2.04 per cent to $41,900.00 but was on track for its second straight week of declines as investors have taken profits following the U.S. approval of spot bitcoin exchange-traded funds.