By Anchalee Worrachate and Kosuke Goto
May 7 (Bloomberg) -- The dollar climbed against the euro and the yen after Federal Reserve Bank of Kansas City President Thomas Hoenig said ``serious'' inflation pressures may prompt the central bank to raise interest rates and retail sales in Europe dropped by a record in March.
The U.S. currency snapped two days of losses versus the euro as the yield spread between Treasuries and German bunds narrowed to the least in two months after Hoenig said the U.S. economy will recover this year. The dollar extended gains against the euro after a government report showed retail sales fell by more than forecast as rising food and oil prices curbed household spending.
Hoenig's comments ``reinforced a view that the Fed has less room to cut rates because there's inflation concern,'' said Mitul Kotecha, head of global currency strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. ``It suggests there's less room for the dollar to fall going forward.''
The dollar climbed to $1.5428 against the euro as of 6:40 a.m. in New York, from $1.5532 yesterday. The U.S. currency also rose to 105.38 yen, from 104.77 yen. The euro fell to 162.56 yen, from 162.71.
``There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it,'' Hoenig, a non-voting member of the Fed this year, said in a speech in Denver late yesterday.
The U.S. currency rose to 7.5142 versus the South African rand from 7.4975. The Australian dollar fell to 94.62 U.S. cents from 94.97 cents late yesterday in New York, while the New Zealand dollar declined to 78.55 U.S. cents from 79.15 cents. The U.S. dollar advanced to 1.0567 Swiss francs, from 1.0521.
`Supportive' of Dollar
The dollar will rise to $1.47 against the euro in three months because the Fed may not lower interest rates any further, according to UBS AG, the world's second-biggest currency trader.
``Macro developments are supportive for the dollar continuing to strengthen,'' Geoffrey Yu, Zurich-based strategist at UBS, wrote in a research note today. ``Fed members stepped up hawkish commentary.''
The dollar has rebounded 3.7 percent versus the euro since April 22, when it sank to a record low of $1.6019. The Fed said rate reductions to date were ``substantial'' after lowering its benchmark rate last week by a quarter-percentage point to 2 percent, its seventh cut since September.
The spread between two-year German notes and similar- maturity U.S. Treasuries was as narrow as 1.36 percentage points, from 1.50 percentage points a week ago after Hoenig's comments. It was at 1.40 percentage points at 7:21 a.m. New York time. The European Central Bank will leave its main refinancing rate at 4 percent tomorrow, according to all 53 economists surveyed by Bloomberg News.
Retail Sales
ECB President Jean-Claude Trichet may be ``less hawkish'' in his statement tomorrow, and may signal that growth is starting to soften in the euro zone, according to Kotecha.
Retail sales in the euro area declined 1.6 percent from a year earlier, the biggest drop since the data series began in 1995, the European Union's statistics office in Luxembourg said today. Economists had forecast a 0.7 percent drop, according to the median of 20 estimates in a Bloomberg News survey. Sales fell 0.4 percent from the prior month.
A doubling of crude-oil prices in the past 12 months and soaring prices for food such as wheat and rice have undermined consumer sentiment across the euro area.
French Confidence
Confidence among households in France dropped to a record low last month, while a European Commission index of sentiment in the euro area also fell in April.
The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, rose to 73.239 from 72.999 yesterday.
``We're dollar bulls,'' said Michael Metcalfe, the head of macro strategy in London at State Street Global Markets, a unit of the world's largest money manager for institutions. ``We've seen the top in euro-dollar.''
The U.S. currency will hold its gains if the Dollar Index continues to close above 73 and data from the euro region ``don't surprise on the upside,'' said Ian Stannard, senior currency strategy at BNP Paribas SA in London.
Gains in the dollar still may be limited by speculation an industry report today will show the housing slump is slowing the U.S. economy. The National Association of Realtors' index of pending home resales fell 1 percent in March after a 1.9 percent decline in February, according to the median forecast of 30 economists surveyed by Bloomberg News. The report is due at 10 a.m. New York time.
`Slowdown Not Over'
Fannie Mae, the biggest financier of U.S. home loans, yesterday reported larger-than-expected losses and the price of crude oil rose past $122 a barrel for the first time.
``The dollar will remain weak,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., Japan's third-largest bank by assets. ``The U.S. slowdown, led by a housing slump and credit losses, is far from over. Hefty oil prices are adding to the dollar-bearish sentiment, especially against the euro.''
The dollar may fall to $1.5560 a euro and 104.30 yen today, Kato forecast.
Crude oil rose yesterday to a record $122.73 a barrel in New York on threats to supply in Nigeria and Iraq and growing global fuel consumption. The euro versus the dollar has had a correlation of 0.96 with the price of crude oil in the past 12 months. A reading of 1 would mean they move in lockstep.
Bank of America Forecast
Bank of America Corp. lowered its forecast for the yen against the dollar as risk appetite among investors has improved. The second-largest U.S. bank predicts the currency will trade at 102 per dollar by the end of June, compared with a previous estimate of 99. It also expects the yen to decline to 105 by the end of September, a change from a previous forecast of 103.
The Korean won fell to 1,026.19 per dollar, from 1,014.50 yesterday, as investors sold won-denominated assets on signs the economy is cooling. Morgan Stanley, the second-biggest U.S. securities firm by market value, said the won may extend its 8.8 percent loss this year because the country is poised for a ``monetary shock'' from overstretched local banks.
The British pound dropped after Nationwide Building Society said an index of sentiment taken from the responses of 1,000 people declined seven points to 70, the lowest since the survey began in May 2004. The pound slid to $1.9571, the weakest in more than two months, from $1.9738. It also fell to 78.78 pence per euro, from 78.70 yesterday.
Deutsche Bank AG, the world's biggest currency trader, yesterday changed its forecast for U.K. interest rates, predicting the Bank of England will cut borrowing costs following a two-day meeting that ends tomorrow rather than leave them unchanged. The median forecast by 61 economists in a Bloomberg News survey is for the central bank to keep the key rate at 5 percent.
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net
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