The U.S. dollar slipped lower in early European trade Friday, retreating from two-month highs but is still on course for a fifth consecutive winning week as a resilient U.S. economy suggested higher rates for longer.

At 03:20 ET (07:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 103.290, after touching a two-month high at 103.59 overnight.

Dollar heads for another weekly gain
The dollar has seen some profit-taking early Friday, with risk sentiment boosted after the People’s Bank of China said it will continue to release more liquidity in an attempt to support the country’s struggling economic recovery.

However, for the week, the dollar index is still set to gain 0.5%, on increased expectations that the U.S. Federal Reserve will maintain its tightening stance for longer than previously thought.

Data released on Thursday showed that U.S. weekly jobless claims fell more than expected, indicating continued resilience in the labor market, providing more room for the Fed to keep raising interest rates.

This followed the release of the minutes of the Fed’s July meeting that showed that most policymakers supported higher rates to curb sticky inflation.

“The minutes of July’s FOMC policy meeting … showed the majority of members kept seeing upside risks to the inflation outlook and left the door open for more tightening,” said analysts at ING, in a note.

Sterling falls after weak retail sales release
GBP/USD dropped 0.3% to 1.2712 after British retail sales fell more sharply than expected in July, dropping 1.2% from June, an annual fall of 3.2%.

Shoppers are clearly feeling the hit from high inflation and 14 back-to-back increases in interest rates, but the impact of bad weather during the month was also felt.

“It was a particularly bad month for supermarkets as the summer washout combined with the increased cost of living meant sluggish sales for both clothing and food. Department store and household goods sales also dropped significantly,” said ONS Deputy Director for Surveys and Economic Indicators Heather Bovill.

Eurozone inflation data due
EUR/USD edged lower to 1.0868, not far removed from Thursday’s six-week low of 1.0856, with the European Central Bank likely to pause a more than year-long rate-hiking campaign in September after hints from President Christine Lagarde.

That said, the latest eurozone inflation release is due later in the session and is expected to show an annual figure of 5.3%, a small drop from 5.5% the prior month, suggesting a further rise by year-end is still on the cards.

Yuan helped by strong fix
Elsewhere, USD/CNY rose 0.1% to 7.2864, with the yuan helped by dollar sales and strong midpoint fixes, but the outlook for the yuan remains largely dour on the prospect of falling interest rates as the Chinese economy, and the property sector in particular, struggles.

USD/JPY fell 0.4% to 145.30, after strong inflation readings for July helping the yen, putting more pressure on the Bank of Japan to eventually begin tightening monetary policy.