Dollar edges higher on safety bid; sterling drops after weak retail sales

The U.S. dollar rose slightly Friday, on course for a positive week, while sterling slipped after the release of weak retail sales data.

At 04:10 ET (09:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher to 104.065, rebounding from near four-month lows and on track for the first weekly gain in three. 

Dollar has safe-haven bid

The dollar bounced off recent lows as U.S. labor and manufacturing data added to the uncertainty over when the Federal Reserve would start cutting rates.

The U.S. currency has also seen demand as a safe-haven call as relations between the U.S. and China weaken, and uncertainty over the U.S. presidential race grows, amid calls for President Joe Biden to drop his reelection bid.  

“Were President Biden to step aside, there is a scenario where the dollar could come a little lower on the view that Democrats would have a better chance of retaining the Senate and that we would be looking at a ‘Trump Constrained’ scenario,” said analysts at ING, in a note.

Sterling retreats from recent highs

GBP/USD traded 0.2% lower at 1.2914, heading lower after climbing to a one-year high earlier in the week.

U.K. retail sales fell 1.2% in June against an estimated 0.4% fall, suggesting the British consumer was feeling pinch from the high interest rates.

Coupled with recent data that indicated slowing wage growth in Britain and inflation at the Bank of England’s 2% target, bets of an August cut have risen to 43%, up from roughly 39% on Thursday. 

EUR/USD fell 0.2% to 1.0878, slipping more from Wednesday’s four-month peak after the European Central Bank kept rates steady at its meeting on Thursday.

“Market expectations for the path of interest rates seem rather reasonable to me at the moment,” ECB policymaker Francois Villeroy de Galhau said in an interview on French radio BFM Business on Friday, when asked if he agreed with expectations of a potential cut in September and another one in December.

Markets are pricing in almost two ECB rate cuts for the rest of the year.

Yen slips after CPI data 

In Asia, USD/JPY fell 0.1% to 157.29, after Japanese consumer price index inflation read softer than expected for June, driving up uncertainty over whether the Bank of Japan will have enough headroom to hike interest rates further at a meeting later this month.

The pair had fallen to around 155 earlier this week, sparking speculation that the Japanese government had intervened in currency markets.

USD/CNY rose 0.1% to 7.2674, with the pair close to levels last seen in November 2023.

The yuan was dented by recent reports that the U.S. was considering stricter trade sanctions on China’s technology and chipmaking sectors – a move that could draw retaliatory measures from Beijing.

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