US dollar slides as Fed rate hike bets fade

Summary

The US dollar fell broadly after weaker retail sales reduced expectations for a September Federal Reserve rate increase, while sterling climbed towards a multi-month high. The Australian and New Zealand dollars reached two-month highs, while the yen strengthened towards 159 per dollar as traders increased bets on faster Bank of Japan rate rises. Alphabet is preparing its first Australian dollar bond sale as major technology companies seek additional funding for AI investment.

Equities

The FTSE 100 fell 0.2% on Friday to close at 10,750.11, giving the index its first weekly decline since early July. The FTSE 250 edged 0.1% higher to 24,867.42 and finished the week broadly unchanged.

Antofagasta dropped 4.6% on Friday, extending its sharp decline for a second session after the miner disappointed investors with its production outlook on Thursday. The FTSE 350 industrial metals and mining index fell 4.1% over the week, its weakest weekly performance since late June.

GB Group sank nearly 31% on Friday, its steepest one-day fall on record, after the identity technology company cut its annual revenue growth forecast. Ladbrokes owner Entain rose 2.1% after beating first-half profit expectations, while Sage, Experian and RELX gained between 1.4% and 4.4% following news that private equity group Silver Lake was in talks to acquire US software company Workday.

In the US, the S&P 500 fell 0.17% on Friday to close at 7,785.76, slipping from Thursday’s record high. The Nasdaq declined 0.28% to 26,729.16 and the Dow Jones Industrial Average lost 0.20% to finish at 53,732.41. The S&P 500 nevertheless gained 0.4% for the week, while the Nasdaq added 0.1%.

Applied Materials fell 5.1% on Friday despite issuing an upbeat quarterly forecast, while Broadcom dropped 5.9% and Intel lost 2%. Workday declined 3.8% after jumping 18% on Thursday following news that Silver Lake was in talks to acquire the software company.

Reddit surged almost 13% on Friday after it was selected to join the S&P 500 from 18 August. Drone companies also climbed after President Donald Trump announced plans for tariffs on imported drones and components, with Unusual Machines soaring 25% and Red Cat rising 8.8%. US retail sales unexpectedly fell in July, while traders put the probability of the Federal Reserve leaving interest rates unchanged in September at 67%.

Forex & Commodities

The US dollar was broadly steady early on Friday as softer US economic data reduced expectations for another Federal Reserve interest rate increase. The euro edged down to $1.154, while the British pound held at $1.350 and the Australian dollar traded at $0.7065.

The Japanese yen strengthened slightly early this morning to around 159.3 per US dollar after news that the Bank of Japan could raise interest rates as soon as September. However, the currency has given back roughly half of the gains made following coordinated US and Japanese intervention in late July and early August.

Expectations for Japanese monetary policy have shifted sharply, with markets now pricing a 76% probability of a Bank of Japan rate increase in September, compared with 24% at the end of July. The central bank is also considering increasing the pace of subsequent rate rises after tightening roughly twice a year since ending its long-running stimulus programme in 2024.

In the US, producer prices were unchanged in July following a revised 0.1% decline in June, while consumer prices rose only slightly last month. These figures, together with the recent unexpected decline in US non-farm payrolls, have reduced the probability of a September Federal Reserve rate increase to around 33%, from about 55% last week.

Spot gold fell early this morning to $4,324 an ounce after reaching its highest level since 5 June on Thursday. The precious metal was heading for a weekly decline as investors took profits following its recent rise.

Oil prices edged higher early on Friday, with Brent crude at $87.08 a barrel and US West Texas Intermediate at $81.31. Both benchmarks remained on course for weekly gains of around 4%, despite falling more than 2% on Thursday, as the US threatened to maintain its naval blockade of Iran indefinitely while Iranian restrictions continued to affect traffic through the Strait of Hormuz.