Dollar strengthens as global tensions take a breather

The U.S. dollar strengthened against most of its main rivals early Friday in New York, and a popular gauge of the currency looked set to log a second straight weekly rise, as traders digested a week in which the Federal Reserve signaled that it may adopt a more measured approach to hiking interest rates even if inflation runs ahead of its 2% annual target.

An escalation of tensions between the U.S. and North Korea, which appeared to ease somewhat early in the session, and trade talks with Washington and Beijing contributed to a week marked by up-and-down trade.

What are currencies doing?

The ICE U.S. Dollar Index which measures the U.S. unit against a half-dozen currencies, was little changed at 93.7530, aiming for a slight 0.1% weekly rise, its second straight weekly advance, and a 2.1% climb so far in May, according to FactSet data. A broader measure of the buck’s performance against 16 rivals, the WSJ Dollar Index saw muted action, holding at 87.03. For the week, that gauge is down about 0.1%, with a month-to-date rise of about 1.7% in sight.

The euro held slipped against the buck at $1.1698, compared with $1.1722 late Thursday in New York.

The British pound weakened to $1.3345, compared with from $1.3379 in the previous session. For the week, sterling has shed 0.8%, while the currency is set for a monthly slump of about 3% versus greenback. Worries about inflation and the outcome of negotiations between the U.K. and its European neighbors over Britain’s exit from the European Union have weighed on the currency in recent trade.

Against the haven Japanese yen the dollar rebounded, last changing hands at ¥109.41, compared with ¥109.25 late Thursday. Another currency considered a haven, the Swiss franc softened, with the dollar buying 0.9920 versus 0.9914 late Thursday.

Meanwhile, the greenback retreated 1,076.26 from 1,077.44 against the South Korean won late Thursday in New York, amid moderating worries about North Korean denuclearization talks. The won-Japanese yen pair rose 0.6%, with the won buying ¥0.1016.

Among North American rivals, the dollar was edging higher against Mexico’s peso last buying 19.5876 pesos, compared with 19.5709 pesos a day ago, while , buying C$1.2921 versus the Canadian dollar from C$1.2882 on Thursday.

What’s driving the market?

Fears about geopolitical tensions moderated somewhat on Friday, providing some lift to the bucks, as investors interpreted North Korean comments following President Donald Trump’s decision to cancel a June 12 meeting between Pyongyang and Washington, citing open hostility, as placating a flare-up in tensions between the countries.

North Korean officials on Friday said the country’s leadership was still willing to meet with Trump. “We express our willingness to sit down face-to-face with the U.S. and resolve issues anytime and in any format,” Kim Kye Gwan, a senior North Korea foreign ministry official.

Meanwhile, investors await comments from Fed Chairman Jerome Powell in Stockholm at 9:20 a.m. Eastern Time, where he may provide more clarity on what was viewed as a policy posture from minutes on Wednesday that appeared set to raise interest rates next month, as expected, but reluctant to tighten monetary policy too rapidly.

On the trade front, there was some posturing around the renegotiation of the North American Free Trade Agreement, after the U.S. threatened to impose tariffs on auto imports for national security reasons. A spokesperson for Canada’s foreign ministry saying it was inconceivable for Canada to pose a national security threat to the U.S. Autos have been a sticking point in Nafta talks.

What data are ahead?

Markets are awaiting economic reports on durable-goods orders and core capital-equipment orders for April are both due at 8:30 a.m., while the University of Michigan’s consumer sentiment index for May is scheduled for release at 10 a.m.

What are strategists saying?

“The Greenback could appreciate further is Powell sounds hawkish and offers fresh insight into the Fed’s monetary policy tightening path beyond June,” wrote Lukman Otunuga, research analyst at FXTM, in a Friday research note, referring to the Fed’s two-day policy meeting starting June 12.

“With the widening interest rate differential still favoring the dollar and expectations elevated over an interest rate hike in June, Dollar strength is likely to remain a dominant market theme,” he wrote.

“Taking a look at the technical picture, the dollar index remains heavily bullish on the daily charts. A decisive breakout above 94.00 could encourage an incline higher towards 94.20 and 94.50, respectively,” Otunuga wrote.