Author: Saqib Iqbal Ahmed
NEW YORK (Reuters) – The dollar weakened against the euro on Tuesday after retail sales data showed signs of exhaustion among U.S. consumers, strengthening the case for Federal Reserve interest rate cuts later this year.
U.S. retail sales rose less than expected in May as lower gasoline and motor vehicle prices weighed on revenues at gas stations and car dealerships.
Sales growth is slowing as higher prices and interest rates force households to prioritize necessities and reduce discretionary spending.
“It may have come later than initially expected, but the tight financial conditions created by the Fed finally appear to be straining household budgets this year,” said Stuart Cole, chief economist at Equiti Capital.
“But a softer pace of consumption may actually be welcomed by the Fed because it makes it much easier to bring CPI back to target levels, especially given the key role that domestic consumption plays in driving U.S. economic activity,” Cole said.
The euro was 0.02% higher at $1.073625. At the beginning of the session, the common currency fell to as low as $1.071.
Against the basket of currencies, the dollar remained stable at 105.30.
“The smaller-than-expected retail sales report increases the likelihood that the Fed will begin cutting interest rates within a few months,” Bill Adams, chief economist at Comerica (NYSE:) Bank, said in a note.
Fed Funds futures showed a 67% chance of at least one rate cut by the September Fed meeting, up from 63% a day earlier.
Philadelphia Fed President Patrick Harker said Monday he supports just one rate cut this year, but left the door open to changing his position depending on emerging data.
A long list of Fed officials will appear at the podium at various locations throughout the day, including Susan Collins of the Boston Fed and Thomas Barkin of the Richmond Fed.
Last week’s soft U.S. inflation readings contrasted with the generally hawkish stance of Fed officials, who lowered their previous median forecast of three-quarter-point rate cuts this year to one.
Last week’s rise in the dollar was mainly driven by a acute sell-off in the euro after French President Emmanuel Macron called early elections in response to the defeat of his ruling centrist party by Marine Le Pen’s eurosceptic National Rally in the European Parliament elections.
Since then, the euro has stabilized.
“Over the weekend, France’s Le Pen said she was ready to work with President Macron and would not seek him out,” said Mohit Kumar, chief economist for Europe at Jefferies.
“Some of the recent risk-taking moves were driven by fears of ‘Frexit’ and the breakup of the eurozone,” he said. “These fears are exaggerated.”
The dollar was little changed against the yen at 157.81 yen, staying below Friday’s six-week high of 158.26.
Sterling was unchanged at $1.2705 that day as investors awaited Wednesday’s inflation data and the Bank of England’s interest rate decision the next day.
Meanwhile, the dollar strengthened 0.6% after the Reserve Bank of Australia kept interest rates unchanged on Tuesday. “The RBA’s position has been well communicated: it remains in wait-and-see mode until it receives more inflation data,” NAB’s Catril said.
In cryptocurrencies, bitcoin fell about 3% to $64,475, a one-month low.
