Key Highlights

  • The US Dollar Index fell 0.3% to 99.67 on Friday but was on track to end a two-week losing streak, up 0.1% for the week.
  • US retail sales fell 0.6% in July, well below the consensus forecast for a 0.1% increase, further reducing expectations for a September Fed rate hike.
  • The probability of a Fed rate hold in September rose to about 67% from nearly 56% a week earlier, according to the CME FedWatch tool.
  • Brent crude rose 1.7% to $88.52 a barrel Friday and gained 4.5% for the week amid the ongoing US-Iran standoff over the Strait of Hormuz.

Weak Retail Data Further Reduces Rate Hike Expectations

The US dollar slipped Friday as weaker-than-expected economic data led to further recalibration of Federal Reserve rate hike expectations, though the currency remained on track to end a two-week losing streak as rising oil prices boosted safe-haven demand. The US dollar index fell 0.3% to 99.67 Friday but was up 0.1% for the week. The US Census Bureau reported that retail sales fell 0.6% month-over-month in July to $763.6 billion, compared with a consensus estimate for a 0.1% increase, while core retail sales fell 0.3% versus a forecast decline of 0.2%.

Economists noted the decline partly reflected softer gas station sales, which actually signaled lower energy prices, along with a shift in Amazon's Prime Day promotional event to June this year from July the previous year, which weighed on non-store sales. Even accounting for these factors, economists said underlying retail spending was weaker last month.

Rate Hike Probability Falls Sharply

Interest rate futures markets adjusted quickly following the week's Inflation and retail sales data. According to the CME FedWatch tool, the probability of the Federal Reserve holding rates steady in September rose to about 67% from nearly 56% a week earlier, while the probability of a quarter-point hike fell to roughly 33% from around 44%. Treasury yields fell following Wednesday and Thursday's inflation readings before rebounding Friday, pushing the benchmark 10-year yield into positive territory for the week, while the shorter-dated 2-year yield remained on track for a weekly decline.

Oil-Driven Demand Offsets Rate Pressure on Dollar

Countering the pressure from softer rate-hike expectations, oil prices climbed sharply this week amid an ongoing impasse between the US and Iran over control of the Strait of Hormuz. Brent Crude rose 1.7% to $88.52 a barrel Friday and gained 4.5% for the week, with tanker traffic through the strait slowing to a trickle and further disruptions reported in the nearby Bab el-Mandeb Strait due to attacks by Iran-backed Houthi forces. The Japanese yen strengthened Friday but was set for a weekly decline of about 1% against the dollar, extending losses despite a historic joint intervention by Washington and Tokyo at the end of last month, a pattern some economists say signals the need for a broader shift in Bank of Japan policy rather than continued currency intervention.