The dollar index (DXY00) fell -0.27% on Friday as weak US retail sales and consumer sentiment reports reduced the odds of a September Fed rate hike to 32% from 35% on Thursday. The dollar's decline was curbed by the 10-year T-note yield rising +5 bp despite the weak US economic reports, driven by inflation concerns. The dollar was also undercut by reduced safe-haven demand as President Trump appears to have given up on plans for any new major military attack on Iran for the time being, favoring economic pressure instead.
Treasury Secretary Bessent said on Friday that the administration will soon announce unprecedented economic measures against Iran that "have never been seen in the history of economic isolation of a country." Yet, the military conflict continues as there were reports that Iran attacked two Abu Dhabi oil vessels in the Strait of Hormuz on Thursday night. Dollar Falls on Weak US Retail Sales and Consumer Sentiment Reports Tired of missing midday reversals? The FREE Barchart Brief newsletter keeps you in the know.
Friday's July US retail sales fell -0.6% m/m, much weaker than market expectations of +0.1%. Ex-autos and gas, July retail sales fell -0.2% m/m, weaker than market expectations of +0.3%. July's weak month-on-month retail sales report was partly due to technical factors, as June sales were temporarily bolstered by World Cup spending and by Amazon's Prime Day being held in June rather than in July last year.
Yet, the weak retail sales report suggested that US consumers are pulling back due to high prices, increased gasoline costs, and a lack of confidence in their finances. The University of Michigan's preliminary August US consumer sentiment index fell by -4.2 points to 51.0, weaker than market expectations for only a small -0.2 point decline to 55.0 from July's 55.2. The markets are discounting a 32% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16, down from 35% on Thursday and 51% as recently as Tuesday.
EUR/USD (^EURUSD) rose +0.34% on dollar weakness. Also, the odds of an ECB rate hike in September of 92% far exceed the 32% odds of a Fed rate hike, supporting the euro's interest rate differentials. The markets are discounting a 92% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.
USD/JPY (^USDJPY) fell -0.08% on dollar weakness. The yen has underlying support from increased expectations of a BOJ rate hike after Bloomberg reported Thursday that Japanese Prime Minister Sanae Takaichi's government supports a BOJ rate hike in either September or October. The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen.
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