US dollar drops as mixed data keeps Fed on track to cut rates mid-year By Reuters

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) -The dollar fell for a second straight session on Thursday after a mixed batch of data showed that the U.S. economy remained on solid footing, but is unlikely to prevent the Federal Reserve from starting to cut interest rates by June.

The was last down 0.3% at 104.36. Against the yen, the dollar slid 0.5% to 149.87.

Traders are once again watching dollar/yen as it topped 150 the last few days, a critical level that puts the market on alert for possible Japan intervention to weaken its currency.

The yen firmed despite Japan’s unexpectedly weak gross domestic product figures, which saw the country lose its title as the world’s third-largest economy to Germany.

In the United States, data showed retail sales, unadjusted for inflation, fell 0.8% in January, much lower than an expected decline of 0.1% based on a Reuters poll. The data was likely weighed down by winter storms.

Unadjusted retail sales in general fall in January. Economists had cautioned before the release of the data not to read too much into any sharp drop.

“Bad weather typically results in short-lived drops in high frequency economic indicators like retail sales and housing starts, which are also likely to be weak when January’s release comes out tomorrow,” said Bill Adams, chief economist at Comerica (NYSE:) Bank in Dallas, in emailed comments.

“This weakness typically reverses quickly as weather returns to normal and people catch up on spending plans delayed by the cold and snow.”

The Fed, he added, is likely to look past one month’s weak retail sales report, especially since there is an obvious explanation from what is a clearly temporary issue.

A separate report showed initial claims for state unemployment benefits fell 8,000 to a seasonally-adjusted 212,000 for the week ended Feb. 10. This is further evidence that the U.S. labor market remains tight.

Another piece of data showed U.S. industrial production slid -0.1% in January, weaker than projected. It is the lowest since October.

However, the U.S. Empire State manufacturing index improved to -2.4 in February, rising 41.3 points after sinking -29.2 points to -43.7 in January, which was the lowest reading since May 2020.

In the same token, the Philadelphia Fed manufacturing index rose 15.8 to 5.2 in February, well above forecast, after rising 2.2 ticks to -10.6 in January. February’s print was the highest since August’s 7.7.

Even with those decent U.S. numbers, the dollar slumped. Against the Swiss franc, the greenback sagged 0.8% to 0.8787 francs.

The euro gained 0.5% to $1.0782, while sterling climbed 0.2% to $1.2590.

Thierry Albert Wizman, global rates and FX strategist at Macquarie in New York, said the dollar’s pullback was likely temporary.

“As long as … this divergence continues between U.S. outperformance and the rest of the world, there’s no reason the dollar’s momentum will reverse anytime soon,” he added. “We will continue to see the dollar stay strong and maybe extend a little further.”

The federal funds futures market sees the first rate easing happening at the June meeting, with an 83% probability, according to LSEG’s rate probability app.

Rate futures have also priced in between three to four rate cuts this year, down from about five a few weeks ago.