Dollar falls on surprise drop in US retail sales

On Friday, the dollar experienced a decline following the release of data indicating a surprising drop in July retail sales in the United States. This news caused the euro and sterling to reach multi-month highs, as traders considered the implications for Federal Reserve policy. Retail sales decreased by 0.6% in July, down from a seasonal 0.2% increase in June, with economists anticipating a slight gain of 0.1%.

Juan Perez, a trading director at Monex USA, noted the signs of economic slowdown in the United States due to weaker-than-expected consumer and producer price inflation data. The probability of a September Federal Reserve rate hike has decreased to 31%, while the likelihood of an increase by December stands at 69%. The dollar index, which gauges the greenback against a basket of currencies, slipped 0.25% to 99.67.

Meanwhile, the euro surged 0.32% to $1.1564, reaching its highest level in six weeks, and the British pound strengthened 0.33% to $1.353, hitting a peak not seen since May 2022. Traders are also watching the situation in the Middle East, particularly the ongoing conflict with Iran and efforts to reopen the Strait of Hormuz, as well as the fluctuating prices of crude oil following recent attacks on tankers and escalating tensions between the United States and Iran.

The Japanese yen appreciated by 0.08% to 159.37 per dollar, marking a weekly decline near 1% as the impact of recent US and Japanese interventions began to wane. This shift has led traders to speculate that either a rate hike or another round of official buying will be required to stabilize the currency. The Bank of Japan is expected to raise interest rates as early as September and is contemplating more aggressive hikes in the future.

Since the end of a massive decade-long stimulus in 2024, the Bank of Japan has raised rates roughly twice a year, with the most recent increase bringing them to a 31-year high of 1%. Despite these official actions, the yen's bearish sentiment has intensified, with its value hitting 40-year lows near 164 per dollar following the intervention in July.

This trend echoes a similar decline in May, when the yen fell back after a series of official buying activities.