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FOREX-US dollar rises to 2-month high versus euro after data

Published 12/11/2009, 04:02 PM
Updated 12/11/2009, 04:03 PM
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* Dollar rises broadly after stronger U.S. consumer data

* Dollar, risk assets relationship breaks down

* Moody's sees no threat to UK, U.S. top rating for now (Updates prices)

By Steven C. Johnson

NEW YORK, Dec 11 (Reuters) - The U.S. dollar jumped to a two-month high against the euro on Friday after surprisingly strong U.S. consumer data boosted expectations the Federal Reserve would raise interest rates sooner rather than later.

U.S. retail sales posted the largest advance since August last month, while consumer sentiment improved sharply in early December. The reports stoked optimism about a recovery in the world's largest economy and pushed the euro below $1.46 for the first time since early October.

"The much stronger-than-expected retail sales number has rekindled expectations of a rate hike sooner than anticipated," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston. "It does appear that the U.S. consumer has been a little bit more resilient than anticipated."

The prospect of prolonged low U.S. interest rates has undermined the dollar in recent months as investors borrow in the low-yielding greenback and reinvest the money in stocks, commodities and higher-yielding currencies in search of returns. The euro hit a 16-month high above $1.51 in November.

The euro, which touched a 16-month high above $1.51 in November, hit a trough of $1.4587 on Friday, according to Reuters data, and was last down 0.8 percent at $1.4619.

That capped a difficult week for the euro zone currency, which was buffeted by worries about the fiscal health of Greece after Fitch cut its credit rating. The euro was down 1.6 percent this week, its worst weekly slide in over a month.

A member of the European Central Bank's Executive Board said euro zone governments risked destroying confidence in their economic management by running up unsustainable deficits and public debt. See [ID:nGEE5BA1P9].

The dollar rose 1.1 percent to 89.15 yen . Sterling fell 0.3 percent to $1.6233 but gained on the euro and yen after Moody's Investors Service said Britain's top-notch sovereign rating was not under threat even though UK fiscal health concerns remain. [ID:nTOE5BA06R]

The top sovereign credit rating of the United States is also not under threat of a downgrade right now, Moody's said.

DOLLAR, EQUITY BOTH UP

The stronger-than-expected U.S. data also led to a breakdown in the inverse relationship between the dollar and risky assets that has existed for much of the past year. Stocks rose early before paring gains.

Good data has tended to pressure the greenback in recent months as investors took on riskier, higher-yielding investments and cut demand for the safe-haven U.S. currency.

"I think the risk appetite trade we've been talking about for months is breaking down and I think the correlation between positive U.S. data and dollar strength is going to take hold," said Melvin Harris, a strategist at Easy Forex in New York.

If subsequent data bolsters the case for the Fed to lift interest rates from record lows sooner than expected, investors wary of using the dollar to finance more lucrative trades elsewhere and instead use the low-yielding yen, Harris said.

Analysts also said moves to close the books on profitable trades were helping the dollar. "Going into the end of the year ... there's quite a bit of interest to cover short dollar positions across the board," said Ronald Simpson, director of currency research at Action Economics in Tampa, Florida.

(Additional reporting by Wanfeng Zhou and Gertrude Chavez-Dreyfuss)

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