SINGAPORE (Reuters) - The dollar held steady on Friday but was poised for a weekly decline as a softer-than-expected U.S. inflation report this week led traders to cut bets on imminent rate hikes from the Federal Reserve, although escalating attacks in the Middle East soured sentiment.
Iran and the United States exchanged intensifying fire in a week-long escalation that has largely unravelled last month's truce, spurring safe haven bids for the dollar and leading oil prices near one-month highs.
Investor attention will be on a speech from U.S. President Donald Trump at 0100 GMT.
In currency markets, the euro was at $1.1445, set for a 0.29% rise in the week. Sterling fetched $1.3476, on course for a 0.56% gain in the week, its third straight week of gains on fading concerns over Britain's fiscal outlook.
The Japanese yen was fetching 162.39 per U.S. dollar, rooted near the 40-year low of 162.84 it touched at the start of the month as traders remained wary of official intervention from Tokyo.
That left the dollar index , which measures the U.S. currency against six other units, at 100.72, set for a weekly drop of 0.24%. The index hit a one-month low earlier this week on easing chances of a near term rate hike but safe-haven flows have helped support the greenback.
"The USD remains the highest-yielding safe-haven currency in the G10 complex," OCBC strategists said in a note.
"Near-term FX price action is likely to continue reflecting the 'USD smile' framework, under which the greenback tends to outperform when markets price either stronger U.S. growth and higher rates or a rise in global risk aversion," they wrote.
Data on Thursday showed U.S. retail sales rose slightly in June as lower gasoline prices weighed on receipts at service stations, but online spending surged, prompting economists to upgrade their second-quarter growth estimates.
The economy's resilience was underscored by other data also showing labour market stability. Economists believe the Federal Reserve would keep interest rates unchanged later this month after data showed consumer price inflation had cooled in June.
Even so, policymakers are wary of banking too heavily on one month of improvement after months when inflation moved in the wrong direction.
Federal Reserve Vice Chair Philip Jefferson suggested he would be open to raising interest rates if there is no near-term improvement in inflation.
Chances for a Fed hike in July stood at 11%, versus a 25% implied probability last week, according to the CME FedWatch tool. Traders are pricing in 26 basis points of hikes by December, down from 44 bps earlier this week.