Dollar Rises to One-Week High Versus Euro on U.S. Retail Gain

By Bo Nielsen

June 12 (Bloomberg) -- The dollar strengthened to a one- week high against the euro as U.S. retail sales advanced in May more than economists forecast, raising speculation the Federal Reserve will increase borrowing costs this year.

The U.S. currency rose against all of the other major currencies except the Mexican peso. It increased 2.4 percent versus the euro this week as Fed Chairman Ben S. Bernanke said the risk of a deeper economic slowdown is receding. An index gauging the dollar against the currencies of six U.S. trading partners rose to the highest level since February.

``The consumer refuses to die,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``That's helpful for the dollar.''

The dollar increased 0.9 percent to $1.5420 per euro at 10:41 a.m. in New York, from $1.5552 yesterday. It touched $1.5380, the highest level since June 5. The U.S. currency rose 0.9 percent to 107.91 yen, from 106.96. The euro traded at 166.43 yen, compared with 166.33.

The Australian dollar fell against all of the other major currencies after the Bureau of Statistics reported that employers unexpectedly eliminated jobs last month. The Aussie dropped 1.3 percent to 93.39 U.S. cents and decreased 0.5 percent to 100.75 yen.

South Africa's rand weakened 0.9 percent to 8.09 against the dollar as the central bank raised its target lending rate by a half-percentage point to 12 percent, less than the 1 percent increase forecast by 18 of 26 economists surveyed by Bloomberg. The rand has fallen 6.7 percent versus the dollar since May 30.

Mexican Peso

The Mexican peso was the only major currency to gain versus the dollar, getting a boost from the U.S. retail report. It increased 0.4 percent to 10.3969 per dollar. The U.S. buys about 80 percent of Mexico's exports.

U.S. retail sales increased 1 percent in May as Americans used their tax rebates to shop, the Commerce Department reported. That following a revised 0.4 percent advance the prior month. The median forecast of 82 economists surveyed by Bloomberg News was for a 0.5 percent increase.

``The key downside risk to the dollar was the consumer,'' said David Watt, senior currency strategist at RBC Capital Markets in Toronto. ``The tax rebates remove that risk for a little while. It's certainly bullish for the dollar in the short term. But it's a Band-Aid solution.''

Traders bet Fed policy makers are more likely to raise interest rates in August. Fed funds futures on the Chicago Board of Trade show a 60 percent probability the central bank will increase borrowing costs by at least a quarter-percentage point, compared with a 7 percent chance a week ago.

Bernanke on Economy

``The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,'' Bernanke said June 9. ``The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.''

The Fed has lowered its benchmark rate to 2 percent from 5.25 percent since September to prevent widening subprime losses from stalling economic growth. The European Central Bank has kept its main refinancing rate at a six-year high of 4 percent since last June.

Speculation that Irish voters may not support a new European Union governing treaty in a referendum today weighed on the euro. A defeat would kill the Lisbon treaty, which requires unanimous approval of all 27 EU nations.

The U.S. currency was supported by speculation that finance ministers from the Group of Eight countries might make comments discouraging the currency's decline at two days of meetings in Osaka, Japan, this weekend.

Lagarde on G-8

G-8 officials will urge emerging nations to stop subsidizing oil consumption and press regulators, notably in the U.S., to look into the trading that has driven crude oil to a record, French Finance Minister Christine Lagarde said in an interview on RTL radio. The G-8 comprises the U.S., Japan, Germany, the U.K., France, Italy, Canada and Russia.

The euro's decline was limited as a report showed European industrial production unexpectedly rose in April. Gains in France and Italy countered weakness in Germany, the region's largest economy.

Industrial output in the 15 nations that share the euro increased 0.9 percent in April from the previous month, the European Union's statistics office said in Luxembourg today. The median forecast of 35 economists surveyed by Bloomberg News was for no change.

The euro rose last week the most against the dollar since late March after ECB President Jean-Claude Trichet said policy makers may increase the main refinancing rate by a quarter- percentage point in July to curb inflation, which is running at the fastest pace in 16 years.

ECB Executive Board member Lorenzo Bini Smaghi told reporters today in Milan that policy makers ``only sent indications for July, not beyond.'' His comment was similar to that of ECB executive board member Juergen Stark on June 10. Pricing of Euribor December futures indicates traders are betting the bank will raise rates at least two times by then.

To contact the reporter on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net