Dollar Hits Two-Month Low Amid Weak US Data, Rising Inflation Fears

The US dollar slid to a two-month low as weak economic data sparked bets of a dovish Federal Reserve. Retail sales dropped 0.6% in July, missing forecasts for a 0.1% increase, while the University of Michigan consumer sentiment index also fell.

Derivatives pricing now puts the probability of a Fed rate hike in September at 31%, and the odds of tightening by year-end at 64%. The disinflation outlook is tied to energy prices: Brent crude remains within an $80-90 per barrel range, and any break higher could alter the trajectory.

The risk of escalation following Israel’s attacks on Lebanon adds a geopolitical layer to this situation. If Brent stays contained, the dollar faces further pressure as the Fed risks lagging other central banks.