Dollar falls on surprise drop in US retail sales

On Friday, the U.S. dollar experienced a surprise drop following a decline in retail sales data for July, prompting the euro and sterling to reach multi-month highs. Retail sales decreased by 0.6% in July, after an unchanged 0.2% increase in June, falling below economists' expectations of a 0.1% rise. This weak consumption data signals an economic slowdown in the United States, according to Juan Perez, director of trading at Monex USA.

The dollar index, which gauges the greenback against a basket of currencies, including the yen and euro, fell 0.25% to 99.67. The euro surged 0.32% to $1.1564, reaching its highest level since June 17, while the British pound strengthened 0.33% to $1.353, hitting a high since May 12. Traders remain cautious about the ongoing U.S. conflict with Iran and efforts to reopen the Strait of Hormuz, with crude oil prices climbing amid renewed attacks on tankers and tensions between the U.S. administration and Iran.

Despite recent softer-than-expected consumer and producer price inflation data, expectations of a Federal Reserve rate hike at the September 15-16 meeting have diminished. The probability of a September rate increase is now at just 31%, with a 69% chance of a rate increase by December. The Bank of Japan is expected to raise interest rates soon, possibly in September, as it considers more aggressive hikes to stabilize the yen, which has fallen to 40-year lows near 164 per dollar.