Dollar hits 10-week low as weak data trims Fed hike bets

The dollar fell to a 10-week low against a basket of currencies Monday as weak US jobs and retail sales data prompted markets to further trim bets on a September Federal Reserve rate hike. The dollar index slipped 0.1 percent to around 99.519, near its lowest level of the month.

"The slowdown in private employment and wage growth in recent months alongside limited evidence of higher energy prices spilling over into core inflation since the US-Iran conflict started is providing more leeway for the Fed to leave rates on hold," analysts at MUFG said.

US retail sales declined 0.6 percent month on month in July, versus a 0.2 percent rise in June and a 0.1 percent gain expected by economists. The report followed an unexpected fall in July nonfarm payrolls and modest consumer price inflation, which together have weakened the case for another increase. Fed funds futures now price a 66.9 percent probability that policymakers hold borrowing costs unchanged at the September meeting, up from 47.6 percent a month earlier, according to the CME FedWatch tool.

The repricing rippled across currencies and commodities. The yen strengthened 0.2 percent to 159.055 per dollar, sterling gained 0.1 percent to $1.3546, and gold rose 0.3 percent to $4,388.62 an ounce. Investors now turn to minutes of the Fed's July meeting, due Wednesday, for further clues on how policymakers view inflation, employment and the rate path ahead of the September decision.

The dollar's slide extends a retreat that began after July's employment report showed nonfarm payrolls fell unexpectedly, with sharp downward revisions to the prior two months casting doubt on the strength of the labor market. Consumer prices rose 0.1 percent month on month in July, with core prices up 0.2 percent, while annual headline inflation held at 3.4 percent — still above the Fed's 2 percent target but showing gradual cooling.

The softer run of data has pushed front-end Treasury yields lower and weighed on the dollar across the board. The euro was little changed at $1.1573, while the Australian and New Zealand dollars held near $0.7085 and $0.5891 respectively. The offshore yuan traded at 6.7428 per dollar ahead of China's latest economic data.

Rate path hinges on Fed minutes

The last time markets priced such a low probability of a September move was in the weeks before the Fed's June meeting, when a run of soft inflation prints led traders to scale back hike expectations before policymakers ultimately held rates steady. The pattern suggests the July minutes, due Wednesday, will be scrutinized for any signal that officials share the market's more cautious view.

Inflation remains the key risk. Oil prices have held near recent highs as uncertainty over the reopening of the Strait of Hormuz drags on, and longer-dated Treasury yields remain elevated as persistent price pressures leave the possibility of future hikes on the table. If energy costs spill into core inflation, the Fed could be forced back toward tightening, a scenario that would likely reverse the dollar's slide.

For investors, the fading hike bets carry broad implications. A weaker dollar supports dollar-denominated commodities and emerging-market currencies while pressuring US exporters' competitiveness, but it also signals slowing US economic momentum that could weigh on equities and shift global capital flows. The September meeting, scheduled for mid-month, will determine whether the market's dovish repricing is validated or reversed.

This article is for informational purposes only and does not constitute investment advice.