The US dollar headed for its first week of declines in six versus its peers on Friday, languishing near a one-week low, as investors continued to assess the impact of the start of the Federal Reserve's cycle of interest rate tightening this week.

The safe-haven greenback is also losing traction – while the euro is benefiting – as traders remain optimistic about ending the war in Ukraine as talks continue between Moscow and Kyiv, although progress on Thursday was elusive.

Sentiment also improved after Russia avoided a default on its dollar-denominated debt. A phone call between US President Joe Biden and Chinese leader Xi Jinping, with a US warning for China not to lend support to Russia, added a further layer of geopolitical risk.

The yen remained near a six-year low after the Bank of Japan left its ultra-accommodative policy setting unchanged on Friday, as widely expected, making it an outlier among developed country central banks exiting emergency pandemic measures.

A more favorable diplomatic backdrop between Russia-Ukraine appears to be developing and there is more downside (dollar index) to be had if momentum moves towards a ceasefire.

Movement Of Some Currencies Against the Dollar

However, the index is still seen heading towards 100 and above as the Fed's hike cycle progresses, they said. The dollar index paused on Friday, standing at 98.104 after declining daily this week, and is set for a 1.03% loss during the period.

The declines came despite the Federal Open Market Committee raising rates and signaling the equivalent of a quarter-point increase at each of the year's remaining six policy meetings, leaving investors in a race to see how much monetary tightening the economy can handle.

The outdated market axiom, which says sell USD on the first Fed rate hike, is circulating with added momentum after the USD failed to rally after this week's undeniable hawkish FOMC.

Sterling added 0.05% to $1.31525, putting it on track for a 0.87% weekly gain, although the BoE softened its language around the need for future rate hikes to "maybe appropriate" from "may be appropriate".

The risk-sensitive Australian dollar was little changed at $0.73725, putting it on track for a 1.08% weekly gain. That would make it six winning weeks out of the last seven, having posted a 1.07% drop last week.

The yen weakened 0.14% to 118.775 per dollar, not far from a six-year low of 119.13 hits Wednesday, and on track for a weekly decline of 1.24%, following a 2.26% decline in the previous period, which was the highest worst in two years.

Dollar Weakening Against Other Currencies

US dollar fell on Thursday and hit its lowest level in a week as investors digested the outlook for the Federal Reserve's monetary policy a day after the US central bank's expected interest rate hike, while the euro rose as investors watched Russia-Ukrainian talks.

The Fed's monetary policy turned hawkish with a quarter-point rate hike on Wednesday and projections that the federal funds rate will hit a range of 1.75% to 2% by the end of 2022 and 2.8% next year, but the central bank has delivered no surprises.

The index remains up 2.4% for the year so far. The euro was up 0.5% at $1.1095 and touched its highest level since early March. Officials from both sides of the Ukraine-Russia conflict are meeting again for peace talks, but they say their positions remain distant.

Euro rose against the British pound and hit its highest level since early February. The Bank of England raised interest rates as expected but softened its language about the need for further hikes.

The dollar was down 0.1% against the Japanese yen. Earlier, Bank of Japan Governor Haruhiko Kuroda said Japan's inflation is unlikely to reach the central bank's 2% target, even considering rising energy costs, making the case for keeping the monetary policy in check very easy.