Dollar Ends Week Higher as Yields Slide, Kashkari Flags Hike Risk

The U.S. dollar ended Friday mixed. It still posted a gain for the week as investors turned more cautious on risk assets. The greenback slipped against the euro, sterling and the Canadian dollar. Declines were modest. It rose against the Australian and New Zealand dollars. It was nearly flat against the yen and the franc.

For the week, the dollar strengthened against every major currency measured. The biggest gains came against the Aussie and the kiwi. Gains against the yen were limited as USD/JPY tested the 40-year high at 161.95 and found willing sellers, traders said.

Short and intermediate U.S. Treasury yields fell Friday. The longer end posted modest gains. The curve moves followed another sharp decline in crude oil prices. Markets grew more confident that Middle East tensions would not disrupt energy flows through the Strait of Hormuz.

The S&P 500 and Nasdaq closed lower for a fifth straight session. The Nasdaq fell 0.24%. The Dow slipped 0.09%. The S&P 500 edged lower by 0.05%. For the week, the Nasdaq dropped 4.60%. The S&P 500 lost 1.95%, its worst weekly performance since early June. The Dow still gained 0.60% for the week and is up 1.65% for June.

Minneapolis Fed President Neel Kashkari spoke for the first time since last week's FOMC decision. He struck a hawkish tone. He said he has shifted from expecting a rate cut earlier this year to now penciling in one rate hike by year-end. Kashkari said inflation pressures are becoming more broad-based. They are no longer just about higher energy prices tied to the Middle East conflict. He called his forecast "a pencil" projection that will depend on incoming data. He reiterated that inflation has been running too high for too long and remains the Fed's top priority.

His comments reinforce a hawkish shift within the Fed. A growing number of policymakers now see the possibility that rates may need to move higher rather than lower if inflation fails to cool. The risk of a hike later this year will cap any rally in risk-on currencies, analysts at several banks said.

For a broader look at currency markets, see our forex market analysis.

Next week the U.S. jobs report will highlight the data calendar. The release is scheduled for Thursday due to the July 4 holiday on Wednesday. Fed Chair Kevin Warsh and other central bankers speak Wednesday at 9 a.m. ET. The payrolls number will feed directly into the rate-hike debate Kashkari opened. A strong print would strengthen the case for holding rates higher for longer or even raising them.