Dollar headed for first down week in 6 as traders assess Fed hikes

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Dollar headed for first down week in 6 as traders assess Fed hikes

The U.S. dollar was headed for its first down week in six versus major peers on Friday, languishing near a one week low, as investors continued to assess the impact of the Federal Reserve'sFederal Reserve's rate tightening cycle this week.

The safe-haven dollar lost traction while the euro gained as traders stayed optimistic for an end to the war in Ukraine as talks between Moscow and Kyiv continued, although progress on Thursday was elusive.

Sentiment was improved after Russia avoided default on dollar-denominated debt.

A phone call between U.S. President Joe Biden and Chinese leader Xi Jinping later on Friday added to the geopolitical risk, as the U.S. warned China not to provide support to Russia.

After raising rates for a third consecutive meeting on Thursday, sterling moved higher and stayed on track for its first winning week in four, beating the hiccup caused by the Bank of England's dovish comments.

The Bank of Japan left its ultra-accommodative policy settings unchanged on Friday, as widely expected, leaving it an outlier among developed-world central banks that are exiting pandemic emergency measures.

A more favorable diplomatic backdrop between Russia-Ukraine appears to be developing, and there is more downside to the dollar if momentum moves toward a ceasefire, according to Westpac strategists.

As the hiking cycle progresses, the index is headed to 100 and above, they said.

The dollar index was paused for breath Friday, standing at 98.104 after declining every other day this week, and set for a 1.03% loss over the period. It fell to 97.724 on Thursday for the first time since March 10.

The Federal Open Market Committee raised rates on Wednesday, signalling a quarter-point increase at each of its six remaining policy meetings this year, leaving investors struggling to figure out how much monetary tightening the economy can handle.

A well-worn market axiom, that sells USD on the first Fed rate hike, is circulating with added momentum after USD's failure to rally in the wake of this week's indisputably hawkish FOMC, according to TD Securities analysts.

The continuation of peace talks, even as the fighting continues in Ukraine, has seen demand for safe havens like the dollar dry up, while the euro has rebounded from last week's nearly two-year trough, on track for its first weekly gain since the beginning of last month.

The currency was slightly weaker at $1.10795 on Friday, but was up 1.60% for the week, its first winning week in six.

The pound was 0.05% up to $1.31525 despite the BoE softening its language around the need for future rate hikes to be appropriate from likely to be appropriate. The Australian dollar was little changed at $0.73725, putting it on track for a 1.08% weekly advance. It would make it six winning weeks out of the past seven, after notching a 1.07% decline last week.

The yen fell 0.14% to 118.775 per dollar, not far from a six-year trough of 119.13 reached Wednesday, and was on course for a 1.24% weekly decline after a 2.26% slump the previous period, which was its worst in two years.