Dollar falls on surprise drop in US retail sales

The U.S. dollar experienced a decline on Friday following data revealing a surprising 0.6% drop in retail sales for July, contrast to the expected 0.1% increase. This news has contributed to the euro and British pound reaching their highest levels in months, as market participants consider the Federal Reserve's monetary policy. Retail sales, which primarily reflect goods sales and exclude inflation adjustments, showed a disappointing 0.6% decline in July after a revised 0.2% gain in June.

Economists surveyed by Reuters had anticipated a 0.1% rise in retail sales. This data suggests a weakening consumption pattern in the United States, signaling an economic slowdown. Earlier this week, softer-than-expected consumer and producer price inflation data has already softened expectations of the Federal Reserve raising interest rates during their September meeting.

Traders are now pricing in only a 31% likelihood of a September rate hike, with a 69% chance of a rate increase by December.

In addition to the economic data, concerns over the labor market have intensified, as the July payroll report indicated a surprise job loss for employers in the previous month. The dollar index, which gauges the greenback against a basket of currencies such as the yen and euro, fell 0.25% to 99.67. The euro climbed 0.32% to $1.1564 and reached $1.1585, its highest level since June 17.

The British pound strengthened 0.33% to $1.353, its highest mark since May 12. Market focus has also been on the U.S. conflict with Iran and attempts to reopen the Strait of Hormuz. Oil prices rose on Friday due to renewed attacks on tankers and a tense exchange of words between the Trump administration and Iranian leadership. The Japanese yen bolstered 0.08% to 159.37 per dollar, on track for a weekly decline of about 1% as the impact of recent U.S. and Japanese interventions wanes.

This leaves traders speculating that either an interest rate hike or another round of official buying may be required to halt the yen's decline. Reuters reported that the Bank of Japan is expected to raise interest rates as early as September and may implement further aggressive hikes. Since concluding its massive, decade-long stimulus in 2024, the BOJ has raised interest rates roughly twice a year, including in June when they reached a 31-year high of 1%.

The recent interventions have not improved JPY sentiment; in fact, bearishness has increased considerably over the past month, reaching four-year highs according to Bank of America analysts led by Ralf Preusser. Most fund managers surveyed by the bank for their recent FX and rates sentiment survey believe that a terminal rate of 2% could stabilize the currency, suggesting four more 25-basis-point hikes.

The yen's retreat mirrors a similar decline in May, when it reached 40-year lows near 164 per dollar; traders view the 160 level as a potential trigger for further official action.