Dollar Drops as Traders Trim Rate Bets After Retail Sales Fall

(Bloomberg) -- The dollar fell for a second day after a report showed August retail sales declined more than forecast, further damping speculation that the Federal Reserve will raise interest rates anytime soon.

The greenback weakened versus most of its major peers as separate reports showed wholesale inflation was unchanged last month while industrial production fell more than projected, reducing the central bank’s scope to tighten policy. Traders are wagering there’s an 18 percent probability of a rate increase when the Fed meets next week, down from 30 percent last week.

"There is a slim chance of something next week -- the weak data is killing the idea," said Win Thin, global head of emerging markets at Brown Brothers Harriman & Co. in New York. "We are pushing the Fed tightening into December more. It will take the wind out of the dollar’s sails."

Dollar bulls have been upended in recent weeks by mixed signals from policy makers on prospects for Fed monetary tightening. The U.S. currency has fallen 3.9 percent this year, reflecting the dimming outlook for the U.S. central bank’s ability to meet its forecast of two rate hikes this year.

Bloomberg’s Dollar Spot Index, which tracks the currency against 10 peers, dropped 0.1 percent as of 5 p.m. in New York. The U.S. currency fell 0.1 percent to $1.1244 per euro and dropped 0.3 percent to 102.10 yen.

Futures indicated a 50 percent chance of an interest-rate increase by December, according to data compiled by Bloomberg, based on the assumption that the effective fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase.

The greenback will strengthen to $1.10 per euro and 105 yen by the end of the year, according to the median forecasts in a Bloomberg survey of analysts.

To contact the reporters on this story: Susanne Barton in New York at swalker33@bloomberg.net, Yun Li in New York at yli934@bloomberg.net. To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Paul Cox, Mark Tannenbaum