By Gertrude Chavez-Dreyfuss and Herbert Lash

NEW YORK (Reuters) -The greenback retreated on Friday amid issues concerning the power of the U.S. economic system after higher-than-expected producer costs raised expectations that the Federal Reserve will desist from reducing rates of interest till not less than the center of the yr.

The rise in producer costs reported by the Labor Division was the most important in 5 months and adopted a hotter-than-expected report on Tuesday for shopper costs final month.

However information on Thursday for U.S. retail gross sales in January confirmed the sharpest drop in 10 months, giving some out there pause because the report prompt slowing momentum in shopper spending as gross sales had been revised decrease in November and December too.

“The FX facet of issues tends to give attention to the truth that there’s nonetheless considerably of a query mark relating to actual exercise within the U.S. economic system,” mentioned Bipan Rai, North American head of FX technique at CIBC Capital Markets in Toronto.

The forex market’s paring of positive aspects was “a little bit of a weird response,” Rai mentioned. It additionally is likely to be positioning forward of the lengthy U.S. vacation weekend and a divergence with the Treasury market of the right way to interpret the financial information, he mentioned.

U.S. markets can be closed on Monday for the Presidents’ Day vacation.

The , a gauge of the buck’s worth versus six main currencies, was on monitor for a fifth straight week of positive aspects. It final rose 0.01% to 104.26, and was up about 0.12% for the week.

Fed funds futures have priced in only a 10.5% likelihood of a fee reduce in March and 33.7% odds of easing in Might, in line with CME Group’s (NASDAQ:) FedWatch Software. At the start of the yr odds that the Fed would reduce charges in March had been 79%.

The yield on two-year Treasury notes, which usually strikes in line with rate of interest expectations, rose 9.1 foundation factors to 4.659%.

The resilient U.S. labor market, stronger-than-expected financial development and the inflation information point out the greenback could possibly be greater than it’s, mentioned Eugene Epstein, head of structuring for North America at Moneycorp in New Jersey.

“I simply see sideways buying and selling or a sluggish grind greater for the greenback as a extra doubtless situation,” Epstein mentioned.

The euro rose 0.04% to $1.0775, whereas the yen weakened 0.22% to 150.23 per greenback.

The yen has touched 150 the previous couple of days, placing the market on excessive alert to a attainable intervention by Japanese authorities to weaken the yen.

The Japanese forex, which is very delicate to U.S. charges, is down 6.5% towards the greenback this yr as buyers pare again their expectations of the Fed reducing charges.

A separate report confirmed that U.S. single-family homebuilding dropped in January, doubtless resulting from harsh climate, however an increase in permits for future development prompt a rebound is probably going within the coming months.

Single-family housing begins, which account for the majority of homebuilding, dropped 4.7% to a seasonally adjusted annual fee of 1.004 million models final month.

The U.S. shopper sentiment survey was additionally launched on Friday, however the forex market confirmed little response.

U.S. shopper sentiment was little modified in February whereas one-year inflation expectations inched up.

The College of Michigan’s preliminary studying on the general index of shopper sentiment got here in at 79.6 this month, in contrast with 79.0 in January. Economists polled by Reuters had forecast a preliminary studying of 80.0.

The survey’s studying of one-year inflation expectations edged as much as 3.0% this month from 2.9% in January.