Dollar dips, then bounces on strong core U.S. retail sales

The U.S. dollar touched a 15-month low and then bounced against a basket of currencies on Tuesday after core retail sales saw strong gains in June, as investors wait on the Federal Reserve’s interest rate decision next week.

The Headline U.S. is Retail sales grew less than expected in June, rising 0.2% during the month. Data for May was also revised higher to show sales gaining 0.5% instead of 0.3% as previously reported.

Core sales showed more resilience, however. Excluding automobiles, gasoline, building materials and food services, retail sales increased 0.6% in June. Data for May was revised slightly up to show core retail sales increasing 0.3% instead of the previously reported 0.2%.

The softer-than-expected headline number suggests that "the Fed is making some progress,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto.

However, “you still did get a fairly strong control group number - that’s going to feed through to GDP and domestic demand. That’s still very much supportive of the fact that the Fed does need to hike rates again later this month,” Rai said.

The dollar tumbled after consumer and producer price gains slowed in June, boosting expectations that the U.S. central bank will stop hiking rates after a widely expected 25 basis-point increase at its July 25-26 meeting.

Fed funds futures traders are pricing in an additional 32 basis points of tightening this year, with the benchmark rate expected to peak at 5.39% in November.

Traders will also be watching inflation releases from regions including the eurozone, Britain and Japan this week for further clues about whether inflation is cooling globally.

The dollar index was last up 0.06% on the day at 99.956, after earlier falling to 99.549, the lowest since April 2022.

The euro dipped 0.02% to $1.1226 after earlier hitting $1.12760, the highest since February, 2022.

European Central Bank (ECB) governing council member Klaas Knot said on Tuesday that the bank will look closely for signs of inflation cooling down in the coming months to avoid taking rate hikes too far.

The European Central Bank is expected to raise interest rates by 25 bps next week.

The dollar rose 0.03% to 138.71 against the Japanese yen, its lowest since May 17, after falling to 137.245 on Friday.

The British pound was little changed at $1.3074, after hitting $1.31440 on Thursday, the highest since April 2022.

The Australian dollar fell 0.15% to $0.6807 after minutes of the Reserve Bank of Australia's (RBA) July policy meeting released on Tuesday showed no major surprises on the rate outlook.