The dollar stabilizes at a six-week high as talks with Iran take center stage, while the yen weakens following disappointing CPI data.

The dollar stabilized at a six-week high on Friday, bolstered by increasing speculation about interest rate increases amid energy-driven inflation due to the ongoing conflict in Iran.

The Japanese yen experienced a slight decline following weaker-than-anticipated consumer inflation data for April; however, market expectations for additional interest rate hikes by the Bank of Japan persisted.

The euro and pound also weakened slightly as markets remained anxious about the conflict in Iran. Although the U.S. and Iran claimed some progress in discussions, significant disagreements over multiple key issues remained.

The dollar maintained its strength near a six-week high amidst mixed signals from U.S.-Iran relations and expectations of rate hikes. The dollar index and its futures saw a small increase, staying near levels last observed in early April.

The greenback was on track for a neutral weekly outcome, having experienced considerable volatility this week due to mixed signals regarding U.S.-Iran negotiations.

U.S. officials indicated some advancement towards a peace agreement, with President Donald Trump expressing readiness to postpone military action until Iran reacted to a new peace offer.

Iran stated it was assessing the U.S.'s latest position on concluding the conflict. Nevertheless, Iran's stockpile of enriched uranium remained a significant sticking point, as Tehran once again dismissed U.S. demands to surrender its reserves. The two parties were also in a deadlock regarding the reopening of the Strait of Hormuz.

Increased speculation about a more aggressive Federal Reserve bolstered the dollar, following minutes from the central bank's late-April meeting that revealed more policymakers considering interest rate hikes in reaction to energy-driven inflation.

The Japanese yen's USD/JPY pair saw a 0.1% rise on Friday, climbing back above 159 yen.

Japan's consumer price index inflation dropped to a four-year low in April, with core inflation also falling significantly below the Bank of Japan's 2% annual target.

However, the decline in inflation was mainly attributed to government subsidies for electricity and gas, while underlying inflation indicators remained relatively positive.

This maintained expectations for further interest rate hikes by the Bank of Japan, which is anticipated to raise rates at an upcoming meeting in June.

The yen was also on track for slight losses this week, continuing to decline after a significant increase due to government intervention in early May.

Other currencies traded within a stable to low range. The Chinese yuan’s USD/CNY pair remained unchanged, while the Australian dollar’s AUD/USD pair decreased by 0.1%, extending losses following disappointing April jobs data on Thursday.

The Indian rupee’s USD/INR pair increased by 0.3% after dropping from record highs of nearly 97 rupees on Thursday, following reports of intervention by the Reserve Bank of India to support the currency.