Dollar Falls on Rate Cut Bets but Ends Two-Week Losing Streak

The dollar fell on Friday (14th) as newly released economic data prompted markets to reassess expectations for Federal Reserve (Fed) rate hikes. However, the dollar ended a two-week losing streak this week, supported by rising oil prices driven by diplomatic tensions in the Middle East, which increased safe-haven demand.

In New York trading, the dollar index (DXY), which tracks the dollar against six major currencies, fell 0.3% to 99.67. It gained about 0.1% for the week.

Markets focused this week on key US inflation data and Friday’s retail sales report for clues on monetary policy direction. These figures showed cooling price pressures and slowing consumer spending, combined with last week’s unexpectedly weak jobs report, easing immediate pressure on the Fed to tighten monetary policy.

The Consumer Price Index (CPI) released Wednesday showed both headline and core inflation slowed in July year-on-year. Thursday’s Producer Price Index (PPI) showed a similar trend, with both headline and core figures posting more moderate annual gains.

The US Census Bureau reported Friday that July retail sales fell 0.6% month-on-month to $763.6 billion, far below the market expectation of a 0.1% increase. Core retail sales declined 0.3% month-on-month, compared to an expected 0.2% gain.

Bill Adams, chief US economist at Fifth Third Commercial Bank, said, "Consumers are cutting back on non-essential spending as rising gasoline and other energy prices increase living costs. The personal savings rate in June dropped to its lowest level since mid-2022."

He added, "The details aren’t as bad as the headline numbers suggest. The drop in gas station sales is actually good news, as it reflects lower prices. Also, Amazon’s Prime Day was moved to late June this year instead of July as in the previous year, which weakened non-store retail sales. But even excluding these one-time factors, retail spending declined last month."

Markets adjusted their expectations for the Fed’s rate path accordingly. According to the CME FedWatch tool, the probability of the Fed holding rates steady in September has risen to about 67%, up from nearly 56% a week earlier. The chance of a 25-basis-point hike has dropped from about 44% a week ago to around 33%.

Adams added, "The weak July retail sales data further reduces the likelihood of a Fed rate hike at its next meeting in September."

Following the CPI and PPI releases, interest-sensitive US Treasury yields fell on Wednesday and Thursday as traders bought bonds heavily. Yields rebounded Friday, pushing the 10-year Treasury yield into positive territory for the week. However, the short-term 2-year Treasury yield remained lower for the week.

This week’s economic data weighed on the dollar, but rising oil prices offset some of the pressure. Brent crude futures rose 1.7% to $88.52 a barrel, gaining 4.5% for the week.

Oil prices rose primarily due to a standoff between the US and Iran over control of the strategic Strait of Hormuz. Both sides claim control over the vital waterway, and Tehran insists Washington must meet demands—including halting hostilities on all fronts and unfreezing Iranian assets—before the strait can be reopened.

The US is considering indefinitely maintaining its naval blockade on Iran, and efforts to end the conflict and restore normal shipping through the strait remain stalled. The number of tankers using the route has sharply declined, raising market concerns about oil supply disruptions. Additionally, attacks on ships by Iran-backed Yemeni Houthi militants in another key Gulf shipping lane—the Bab el-Mandeb Strait—have further heightened concerns.

Yen depreciated 1% this week

In other major currencies, the yen strengthened Friday but depreciated about 1% against the dollar for the week.

After the historic joint intervention by Washington and Tokyo at the end of last month, the yen failed to maintain its gains and has weakened against the dollar over the past two weeks.

Meanwhile, the euro and British pound both rose this week, with the former up 0.1% and the latter gaining about 0.3%.

Prices as of around 6:00 a.m. Taiwan time on Saturday (15th):

Dollar index at 99.6391. -0.3186%

EUR/USD at 1.1569. +0.3470%

GBP/USD at 1.3531. +0.3337%

AUD/USD at 0.7084. +0.3542%

USD/CAD at 1.3872. -0.4164%

USD/JPY at 159.3100. -0.1254%