The dollar was little changed on Friday after strengthening in the previous session, as traders analyzed central bank rate hikes and grappled with the prospect that borrowing costs still have a way to go.
The euro was unchanged against the dollar at $1.063, following a 0.5% fall on Thursday after the European Central Bank (ECB) raised interest rates and signaled it was far from over, raising concerns about potential damage to the global economy and sending investors scrambling for safety.
A day earlier, Federal Reserve Chairman Jerome Powell said policymakers expect US rates to continue to rise and remain elevated for longer.
The central bank's "hawkish" rhetoric has caused investors to reconsider their bets that the impact of interest rate hikes may soon end. That triggered a sell-off in global stocks and European bonds on Thursday and Friday, supporting the US dollar and weighing on currencies considered riskier.
"In the short term we have a situation where the market wants to sell the US dollar, not holding yesterday's price action, but as we enter the new year, it could reverse due to the slowdown in global growth," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
Against the Japanese yen, the US dollar slipped 0.49% on Friday to 137.08. It was 0.07% lower against sterling, with the pound changing hands at $1.219. The US dollar index, which measures the currency against six major currencies, was broadly unchanged at 104.48, after strengthening more than 0.9% on Thursday.
The US dollar index has surged around 9% this year as the Fed has raised interest rates rapidly. But it has fallen about 8% since hitting a 20-year high in September, as a slowdown in US inflation has raised hopes the Fed's rate hike cycle will soon end, and better-than-expected economic data from Europe has boosted the euro.
The Bank of Japan (BOJ) decided on policy on Tuesday, and while no change is expected at the meeting, some market participants have begun betting on a hike as Governor Haruhiko Kuroda prepares to depart in April.
I am with the market consensus and do not expect any policy changes at the December BOJ meeting, but I want to be cautious about any comments from Governor Kuroda on the next leadership,” said Takahiro Sekido, head of Japan strategy at MUFG.
The risk-sensitive Australian dollar was 0.07% lower at $0.67 against the US dollar. It declined 2.38% in the previous session, its biggest decline since March 2020. The New Zealand dollar strengthened by 0.38% to $0.637.
