By James Ramage

The dollar edged lower against the yen Friday as investors’ views on U.S. consumer spending and economic growth have darkened, pushing back market expectations for higher interest rates by midyear.

The U.S. currency fell 0.3% to 118.79 yen in late-afternoon trade, marking its second straight decline after dropping 1.1% on Thursday. The WSJ Dollar Index, which compares the dollar against a basket of widely traded currencies, declined 0.2% to a one-week low of 85.34.

Investors soured on the dollar after the University of Michigan’s preliminary February consumer sentiment index slid to a final January reading of 93.6 from 98.1. Economists had predicted the index, which measures U.S. consumer opinion on the economy, would inch up to a reading of 98.3.

“The University of Michigan index really was not good at all,” said Simon Derrick, chief market strategist at BNY Mellon. “It adds a little bit to the interest-rate expectations you’ve seen in the past couple of days, moderating slightly where people expect rates to be by year-end. That translates into a weaker dollar.”

Over the past two days, growth and consumption numbers have begun to dent investors’ perceptions that stronger U.S. data would move the Federal Reserve to raise interest rates from near zero around midyear, and before rival central banks would. Higher rates in the U.S. make the dollar more attractive to investors as they boost returns on assets denominated in the currency.

U.S. retail sales unexpectedly fell 0.8% last month after decreasing 0.9% in December, indicating that consumer spending has started slowly in 2015 even as plunging oil prices have padded shoppers’ wallets. And two weeks ago, the Commerce Department reported that U.S. gross domestic product grew at a 2.6% pace in the last three months of 2014.

To be sure, recent numbers showing robust job growth portray a U.S. labor market that has improved markedly, a segment of the economy the Fed monitors closely in considering when to increase U.S. rates.

Fed funds futures, which investors use to bet on central-bank policy, showed Friday that investors and traders see a 41% likelihood of a rate increase in July, according to data from CME Group Inc. That compares with a 47% probability on Wednesday.

In other trade, the euro traded flat against the dollar, at $ 1.1399.

–Write to James Ramage at [email protected]

    (END) Dow Jones Newswires   02-13-151651ET   Copyright (c) 2015 Dow Jones & Company, Inc.