Dollar edges lower against euro as markets trim rate hike bets

By Chibuike Oguh

NEW YORK Aug 17 (Reuters) - The dollar edged lower against the euro and the Swiss franc on Monday as traders trimmed rate hike bets in the wake of softer U.S. economic data.

Traders are selling off the dollar as they worry about U.S. economic growth and the Federal Reserve's interest rate response after recent underwhelming data, said Kit Juckes, chief FX strategist at Societe Generale.

Data showed last week that U.S. retail sales fell in July for the first time in nine months, adding to unexpected job losses last month and mild inflation readings.

The euro hit a two-month high and was last up 0.08% at around $1.1578 on the day. 

"We had a series of softer numbers in the U.S., with payrolls and retail sales coming out soft. That's going to reprice expectations to some degree about how much the Fed is going to tighten policy. The knee-jerk reaction of that is what is partly sending the dollar down," Juckes said.

Traders expect just a 30.6% chance of a rate increase at the Fed's September meeting, compared with 52.2% a week ago, according to the CME FedWatch tool.

The repricing comes as markets prepare for the Fed's Jackson Hole symposium next week, where investors will look for clues on policymakers' interpretation of the latest economic data.

"The CFTC (Commodity Futures Trading Commission) data showed a big, big, big net dollar long position, which is being squeezed out at the back end of August. Obviously, it's squeezable at this time of the year. I think the markets sold the dollar and then paused a little bit," Juckes said.

The dollar weakened 0.34% to 0.81085 against the Swiss franc.

YEN INCHES LOWER

Joint efforts by the U.S. and Japan to stem the slide in yen have also set up a delicate backdrop for currency markets and the focus has shifted to whether the Bank of Japan will raise rates soon.

The yen pared early gains and was last down 0.11% to around 159.49 per dollar, brushing aside weaker-than-expected Japanese economic growth data. Japanese and U.S. authorities intervened in currency markets in late July to stem the yen's weakness. 

The dollar index, which measures the greenback against a basket of other major currencies, recouped losses after falling to its lowest since early June. It was last flat at 99.60.

"While the market is pricing in a sharper BoJ rate hiking cycle, USD/JPY could trade higher on the back of strong global risk sentiment and elevated US terminal rate pricing despite a modest US inflation print," said Morgan Stanley analysts led by David Adams in an investor note.

China's industrial output growth slowed while retail sales grew less than expected in July, data on Monday showed.

The dollar weakened 0.03% to 6.742 versus the offshore Chinese yuan.

The Australian dollar  strengthened 0.34% versus the greenback to $0.7105.

(Reporting by Chibuike Oguh in New York; Editing by Mark Potter and Sanjeev Miglani)