The dollar climbed to a three-week high against the euro as reports that US retail sales rose in April and consumer confidence improved in May boosted optimism the economy will avoid falling into recession.
Triggering the US currency's gains earlier on Friday, figures showed accelerating inflation in the euro zone, which may prevent the European Central Bank from cutting interest rates again, as it did yesterday, to boost growth. Separately, a German report showed retail sales fell in March.
"The dollar has got room to rally" against the euro given the contrast in reports from the US and the euro region, said Lara Rhame, a foreign exchange economist at Brown Brothers Harriman & Co.
The US currency rose toUS$0. 8754 per euro, from US$0.8814 late yesterday in New York. It reached its high for the day after a University of Michigan preliminary index of consumer sentiment for May unexpectedly rose. The dollar reached as strong as US$0.8741 per euro, its highest since US$0.8699 on April 18.
Signs of reviving US growth also caused investors to scale back expectations the Federal Reserve will cut interest rates further, past a reduction of as much as a half-point forecast when policy-makers meet next week. A half-point cut would drop the Fed's benchmark rate to 4 percent.
Robert Blake, senior economist at Royal Bank of Scotland Financial Markets, said investors may have to factor in the potential for inflation to become a concern in coming months.
Accelerating prices could be a gloomy prospect for the dollar, by causing US debt prices to tumble and scaring away foreign investors, he said.
"Inflation is never good for a currency," said Blake.
Investors may have to start thinking about the possibility the Fed will need to start raising rates again to tame inflation, he said.
On the week, the dollar rose 1.8 percent against the euro, its biggest gain in eight weeks, and strengthened 0.9 percent versus the yen.
The April 18 high of about 87 cents was also the dollar's strongest level so far this year, and is likely the next target for traders trying to push the currency higher, analysts said.
Helping spur dollar gains, US retail sales rose 0.8 percent last month, compared with forecasts for a 0.1 percent gain. In contrast, sales in Germany fell 1.9 percent in March from the prior month. Expectations had been for a 0.5 percent increase.
The euro has shed about 1 cent since the ECB surprised investors yesterday by lowering rates a quarter point to 4.5 percent, after weeks of statements from officials suggesting inflation was too high to consider a cut.
While some investors said the move to drop rates was in the right direction given signs of slowing growth, they took issue with the way the bank communicated its intentions.
"The [currency] market is effectively punishing the ECB" for the bank's lack of transparency and its inconsistent message, said Daniel Scherman, who helps manage US$24 billion of bonds at MFS Investment Management in Boston. "It's difficult for me to imagine the ECB in the near-term redeeming any modicum of credibility." Concern about the euro and the cost of hedging against potential euro declines are making MFS reluctant to shift funds out of Treasuries and into European bonds, he said.
Today's reports are helping the dollar and hurting the euro as they are influencing how international money managers hedge their holdings, said David Johnson, head of institutional and hedge fund currency sales at HSBC Bank USA.
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