FOREX-Dollar on track for best week in four as investors weigh U.S. recession risks

TOKYO Reuters -- The dollar was little changed against major peers on Friday, but was on track for its best week in four as investors weighed the boost from tighter Federal Reserve policy and the risks of a U.S. recession.

The dollar index, which measures the currency against six counterparts, rose 0.07% in Asian trading after a 0.32% drop overnight when it was undermined by weaker than expected consumer spending data.

It gained 0.66% in a complex push and pull for the week because of fears of a global slowdown that hurt the greenback's appeal due to its haven status. The market will be watching for weakness in U.S. ISM manufacturing figures later in the day.

The RBC Capital Markets strategists wrote in a note to clients that the USD sentiment has deteriorated because of rising recession fears, but focusing on U.S. growth in isolation has never been a good way to trade USD.

The odds of the United States falling into recession are extremely low, according to strategists. They said that the dollar and other haven currencies like the yen and Swiss franc would benefit from the cost of commodity currencies and sterling for the duration of a global downturn.

The central bank's biggest hike since 1994 came last month last month, with half of that coming last month because of the Fed's lifting of the policy rate by 150 basis points since March. The market is betting on another of the same magnitude at the end of the month.

The European Central Bank is expected to raise interest rates for the first time in a decade, but economists are divided on the magnitude of the hike.

Markets will look at euro zone inflation data later in the day to get a better sense of how aggressive the ECB might be.

The euro fell 0.16% to $1.0469 on Friday, after a 0.39% decline on Thursday saw it rally 0.39% to come off a two-week low of $1.0381.

It is down 0.86% for the week with investors judging Europe's economic predicament to be more precarious than in the United States, as a result of the war in Ukraine.

The yen was roughly the same, with one dollar buying 135.77 of the Japanese currency.

The yen dropped to a multi-decade low of 137.00 per dollar mid-week, as the Fed's aggressive stance contrasted sharply with the Bank of Japan's steadfast dovishness.

The dollar has gained 0.41% against the yen since Friday, which would be a fifth weekly gain.

The pound dropped 0.26% to 1.21475, reversing Thursday's 0.45% rise. It has dropped 1.02% for the week.

The risk-sensitive Australian dollar was 0.26% lower, changing hands at $0.6885. It has fallen 0.81% this week.

The Reserve Bank of Australia decides policy on Thursday, and markets expect a half point hike to the key rate. Aussie has not helped much, as commodity prices have fallen as the global outlook deteriorates.

Westpac strategists have been arguing for a time for weakness below $0.70, and we would give this dip time to unfold, especially given widespread stagflationary pressures.