US Dollar Slips as Weak Retail Sales Reduce Fed Rate Hike Bets

The U.S. dollar edged lower on Friday as weaker economic data prompted traders to scale back expectations for another Federal Reserve rate hike. Despite the decline, the greenback was poised to end a two-week losing streak as higher oil prices and Middle East tensions supported safe-haven demand.

The U.S. Dollar Index, which measures the currency against six major peers, fell 0.3% to 99.67 but remained about 0.1% higher for the week.

Recent U.S. inflation and consumer spending figures have strengthened expectations that the Fed could keep interest rates unchanged in September. July's consumer price index showed slower annual headline and core inflation, while producer price data also indicated moderating price pressures.

Adding to the dovish outlook, U.S. retail sales dropped 0.6% month over month in July to $763.6 billion, sharply missing expectations for a 0.1% increase. Core retail sales declined 0.3%, compared with forecasts for a 0.2% gain.

According to the CME FedWatch tool, markets now see roughly a 67% probability that the Federal Reserve will hold rates steady in September, up from around 56% a week earlier. The probability of a 25-basis-point rate hike has fallen to approximately 33%.

Meanwhile, rising oil prices helped limit the dollar's losses. Brent crude climbed 1.7% to $88.52 per barrel and was heading for a 4.5% weekly gain amid concerns over shipping disruptions in the Strait of Hormuz. The ongoing U.S.-Iran standoff and attacks on vessels around the Bab el-Mandeb Strait have increased fears of tighter global oil supplies.

In currency markets, the Japanese yen strengthened slightly Friday but remained on course for a roughly 1% weekly decline against the dollar. Its weakness has continued despite recent U.S.-Japan intervention and reduced Fed rate hike expectations.

The euro and British pound were also positioned for weekly gains, rising approximately 0.1% and 0.3%, respectively, as traders assessed shifting U.S. monetary policy expectations and geopolitical risks.