Dollar Slips on Weak Retail Sales, But Holds on for First Weekly Gain in Three Weeks

The U.S. dollar weakened on Friday after retail sales figures pointed to softer-than-expected consumer spending, adding to evidence that the Federal Reserve may have less need to raise interest rates. Despite the daily decline, the greenback is on pace to snap a two-week losing streak.

Dollar Pressured by Weak Consumer Data

Friday's soft retail sales report compounded investor sentiment shaped by milder inflation data earlier in the week. With the Producer Price Index showing no change month-over-month in July and core consumer price inflation remaining moderate, traders have scaled back expectations for further monetary tightening.

According to the CME FedWatch Tool, money markets now price in approximately a 35% probability of a Fed rate hike in September, a significant drop from 55% a week ago. This repricing reflects a growing consensus that inflationary pressures are easing, reducing the urgency for the central bank to act.

Weekly Gain Intact Despite Friday's Dip

As of 9:49 AM ET, the U.S. Dollar Index (DXY), which measures the greenback against a basket of major currencies, was down 0.45% on the day to 99.51. However, it was still poised for a weekly gain of 0.1%, its first in three weeks.

Other major currencies capitalized on the dollar's softness:

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• The euro (EUR/USD) rose 0.2% to trade around $1.1540.
• The British pound (GBP/USD) gained 0.3% to $1.3500, supported by strong second-quarter UK GDP data, putting it on track for a third consecutive weekly gain.

Despite the dovish U.S. data, foreign exchange market volatility remains subdued, limiting the dollar's losses. "The mid-summer market environment following the CPI data has understandably suppressed FX volatility," analysts at ING wrote in a note. The firm added that it remains biased toward a weaker dollar, believing the market is "too confident" in further Fed tightening.

Yen Weakness Puts BoJ in the Spotlight

In Asia, the Japanese yen gained 0.2% against the dollar on Friday, with USD/JPY trading near 159.20. Yet, the yen is set for a weekly loss of nearly 1%, its worst performance in a month, as the effects of a joint U.S.-Japan intervention in late July and early August continue to fade.

The yen's persistent weakness is increasing pressure on the Bank of Japan (BoJ). A Reuters report on Friday suggested the BoJ could raise interest rates as soon as September and may consider a more aggressive tightening path than previously anticipated, driven by concerns over the weak currency and rising energy prices.

Money markets are pricing in a nearly 80% chance of a BoJ rate hike in September. Still, the yen has struggled to find sustained support as demand for carry trades persists. The next major catalyst for currency markets is expected to be commentary from Fed officials at the upcoming Jackson Hole symposium.