The U.S. dollar recovered modestly on Friday after falling sharply the last few days, as investors consolidated losses ahead of the weekend, but its trajectory remained tilted to the downside with the Federal Reserve near the end of its rate hike cycle amid softening inflation.
The greenback, however, was on track for its biggest weekly decline since November against a basket of six major currencies.
The dollar index edged 0.22% higher at 99.93, after touching a 15-month low of 99.574 earlier. The index was down 2.3% for the week, its biggest weekly decline in eight months.
U.S. producer prices barely rose in June and the annual increase in producer inflation was the smallest in nearly three years, data showed on Thursday, a day after data showed consumer prices rose modestly last month.
"The embattled dollar is catching a breather after enduring its worst week of the year," said Joe Manimbo, senior market analyst, at Convera in Washington.
"While expectations the Fed is all but done hiking won't help the buck, the market is now waiting on the central bank's July meeting to see if officials abandon their tightening bias," he added.
Markets are still pricing in a 96% chance of a 25 basis point hike from the Fed later this month, CME's FedWatch tool showed, but no more for the rest of the year.
Investors have been betting on a turn lower in the dollar for months, with short positions more than doubling over the month to July 7, according to data from Commodity Futures Trading Commission, although they remain far off the levels in 2021.
U.S. central bank officials, however, remain cautious, with Fed Governor Christopher Waller saying he is not ready to call an all-clear on U.S. inflation and favors more rate rises this year.
Against a weakening dollar, the euro touched a fresh 16-month peak of $1.1243 in Asian hours before flattening at $1.1225.
"(The euro) has taken off on the back of U.S. disinflationary bets and a large unwinding of dollar positions: said Francesco Pesole, FX strategist at ING.
"Our short-term fair value model shows that the pair (euro/dollar) has now entered overvaluation territory,"
Against the Swiss franc, the dollar gained 0.4% to 0.8611 francs, rising from an eight-year low of 0.8568. The dollar was on pace for its largest weekly percentage loss versus the franc since December last year.
Against the Japanese yen, the dollar rose 0.6% to 138.87, but was on course for its worst week since January.