Dollar dips ahead of US inflation data, Fed meeting next week

The dollar edged lower against major currencies on Friday as concerns resurfaced about the health of the US economy, and ahead of producer inflation data later in the day and a Federal Reserve meeting on interest rates next week.

After a lull in market-moving news, investors are looking towards rate decisions next week – including from the Fed, the European Central Bank and the Bank of England.

Markets are betting all three will slow the pace of their rate hikes, with 0.5 percentage point increases across the board, while still trying to check inflation.

Volatility levels for major currencies have retreated towards their long-run average, currency analysts at MUFG said in a note, as markets start to price in the prospect of peak interest rates early next year.

"Part of the decline in volatility we would put down to market pricing indicating most central banks are approaching terminal rates suggesting Q1 will be the quarter when most central banks will pause after roughly 12 months of tightening," the note said.

US data on producer price inflation due at 1330 GMT will be closely-watched for signs price rises are cooling, with consumer price data set to follow on Tuesday.

Data on Thursday showed a moderate increase in US jobless claims, adding to investor nerves about the outlook.

The dollar index – which measures the greenback against a basket of six major currencies – was last down 0.1% at 104.680. =USD

The index remains up about 9.5% for the year so far, but is down more than 6% for the fourth quarter, reflecting lowered expectations for inflation and interest rates.

Markets are pricing in a 93% chance that the Fed increases its benchmark rate by 0.5 percentage points at its meeting on 14 December, according to Refinitiv data, with a 7% chance of a 0.75 percentage point hike.

Against the greenback, the euro EUR=EBS was flat at $1.05580, close to its six-month peak hit at the start of the week and on track for a third straight week of gains.

Sterling edged up 0.2% on the day to $1.22680 GBP=D3, not far off Monday's six-month high of $1.2345, as the government announced reforms designed to maintain London as one of the most competitive financial hubs in the world.