The dollar edged higher on Friday after falling a day earlier on a surge in U.S. jobless claims and a modest rise in inflation. The Federal Reserve is likely to end its nine-month pause and resume rate cuts at its meeting next week.



The dollar rose 0.2% against the yen to 147.53, marking its third consecutive weekly gain. Earlier, a joint statement between the United States and Japan emphasized that exchange rates should be determined by the market and stated that excessive volatility and disorderly movements were undesirable, which also boosted the dollar. The dollar index was essentially flat at 97.59, but still recorded a weekly loss of 0.1%, its second consecutive weekly decline.

John Velis, Americas macro strategist at BNY in New York, said Friday's gains were more of a position adjustment before the weekend. "From a broader perspective, the outlook for the dollar remains bleak," he said. "On the one hand, the Fed is about to start cutting interest rates; on the other hand, we continue to see hedging activity, with foreign investors buying U.S. assets and selling dollars, which will continue to put pressure on the dollar."

Data showing that U.S. consumer confidence fell for the second consecutive month in September also put a slight drag on the dollar. The University of Michigan said on Friday that its consumer confidence index fell to 55.4 this month, the lowest since May, from a final reading of 58.2 in August. Economists had expected a reading of 58.0, essentially unchanged from the previous month.

“If the Fed cuts rates next week, as widely expected, and signals more rate cuts to come, businesses may feel optimistic about the opportunity to recoup profits lost to tariffs, leading to increased hiring,” Tom Simons, chief U.S. economist at Jefferies, wrote in an email after the data was released.

Data on Thursday showing the biggest weekly increase in U.S. jobless claims in four years overshadowed August consumer inflation data that showed prices rising at their fastest pace in seven months, though the overall gain was still modest and broadly in line with expectations.

While mixed data could complicate the Federal Reserve's policy discussions next week, investors remain primarily focused on the prospect of rate cuts. According to CME Group's FedWatch tool, federal funds futures pricing indicates a consensus that the Fed will cut its key interest rate by 25 basis points on September 17. However, traders have scaled back bets on a larger (50 basis point) rate cut next month, with current pricing suggesting a more modest easing path this year than previously anticipated.

The benchmark 10-year Treasury yield rose 4.9 basis points to 4.06%. On Thursday, it fell below 4% for the first time since April.

The euro was flat at $1.1736 after rising the previous day. Traders reduced their bets on another European Central Bank rate cut this cycle, now seeing less than a 50% chance of another move.

The European Central Bank kept its key interest rate unchanged at 2% for the second consecutive meeting on Thursday. ECB President Christine Lagarde said the eurozone is in a "good position" and economic risks are more balanced than before.

Fitch downgraded France's credit rating on Friday as repeated government collapses plunge the country into a protracted struggle to control its ballooning debt burden. The agency lowered France's credit rating from AA- to A+, one notch below the UK and on par with Belgium. Fitch currently gives France the lowest rating among the major sovereign rating agencies, six notches above junk status.

Fitch said, "Since the legislative elections scheduled for mid-2024, France has had three changes of government. This instability has weakened the political system's ability to pursue substantial fiscal consolidation and made the previous government's target of reducing the fiscal deficit to 3% of GDP by 2029 almost impossible to achieve." Fitch also warned that "the period leading up to the 2027 presidential election will further limit the scope for fiscal consolidation in the short term, and the political deadlock is very likely to persist after the election."

"If it explicitly goes against the direction of its (Fitch) model and 'manually' downgrades the ratings, the ratings agency must conclude that the balance of power among stakeholders in public funds has shifted further away from financial creditors since its last ratings decision in the spring," Citi analysts wrote in a research note.

The pound was little changed at $1.3564 against the dollar after data showed the UK economy stagnated in July. TD Securities strategists said in a note that the pound is likely to react more to any major surprises in UK inflation data for August than to the Bank of England's policy decision next week. The strategists said that due to continued strong growth and inflation, the Bank of England (BOE) is widely expected to hold interest rates steady next Thursday and is unlikely to give any signs of imminent policy easing. If Wednesday's inflation report is significantly lower or higher than expected, the pound will react more strongly as "markets debate the possibility of another BoE rate cut before the end of the year."

Barclays analysts said in a report that the pound could rebound because markets appear overly pessimistic about the UK's fiscal situation and economic outlook. They stated that while the government's fiscal space has diminished, the debt burden does not appear unsustainable. Furthermore, the UK economy has proven more resilient than expected over the past few years. Markets are shorting the pound, anticipating a decline. If the government can deliver a credible Autumn Budget in November by adhering to its fiscal rules, ideally favoring spending cuts and expanding fiscal space, this would create "conditions for a rebound."