Weaker U.S. economic data has lowered market expectations for a Federal Reserve rate hike next month, pushing the dollar lower against most major currencies.
The dollar index fell 0.2%, marking its third consecutive trading day of decline and hovering near its lowest level since May. The MSCI Emerging Market Currency Index is poised to hit a record high, led by the New Taiwan dollar and Thai baht in the Asia-Pacific region. Meanwhile, the Bloomberg Asia Dollar Index climbed to its highest level since May.
U.S. government data released on Friday showed that retail sales in July declined at the steepest pace in over a year, as consumers cut spending, further weighing on the dollar. Swap traders now see less than a 30% chance of a Fed rate hike next month, down from around 50% just a week earlier.
Continuing softness in U.S. inflation data and weak retail sales have prompted traders to lower their expectations for the Fed raising borrowing costs before year-end—expectations that had previously supported the dollar.
Richard Franulovich, head of foreign exchange strategy at Westpac Banking Corporation in Sydney, said regular talks between President Donald Trump and Federal Reserve Chair Kevin Warsh, along with renewed attempts to oust Fed Governor Lisa Cook, are also contributing to dollar pressure.
“Trump’s ongoing dialogue with Warsh, the renewed effort to remove Cook, and the uncertainty surrounding the Fed’s response mechanisms continue to fuel market skepticism about the dollar’s safe-haven status,” he said. “The renewed push toward de-dollarization is another upward catalyst. Last week, yields on U.S. 10-year and 30-year Treasury auctions reached multi-year highs, reinforcing this trend.”
Jan Hatzius, chief economist at Goldman Sachs, wrote in a client report that the likelihood of a central bank rate hike at September’s meeting is “very low” due to weak retail sales, disappointing employment data, and slowing inflation.
“Based on our baseline economic forecast, inflation news is more likely to improve further over time rather than deteriorate again,” Hatzius said. “We still believe markets are pricing in too hawkish an outlook for federal funds rates.”
Goldman’s report also noted that the U.S. Treasury yield curve could steepen further due to improving inflation, declining rate premium, and poor budget news. After two consecutive months of sharply weak employment and inflation data, it would be difficult to see any dovish policymakers turn toward tightening.
