Dec. 12 (Bloomberg) -- The dollar advanced to a two-month high against the euro as a bigger-than-forecast increase in retail sales and consumer sentiment indicated the U.S. economic recovery may be gaining momentum.
New Zealand’s dollar posted its biggest weekly gain in a month against the greenback after Reserve Bank Governor Alan Bollard said he expected to begin raising interest rates in the middle of 2010. Federal Reserve Chairman Ben S. Bernanke said this week a “moderate” pace of U.S. expansion is likely. Officials will decide on policy at their Dec. 15-16 meeting.
“We are dollar bulls,” said David Forrester, a currency economist at Barclays Plc, in an interview on Bloomberg Television. “Data will continue to surprise on the upside.”
The dollar appreciated 1.7 percent to $1.4615 per euro this week, from $1.4858 on Dec. 4. It touched $1.4586 yesterday, the strongest level since October. The dollar decreased 1.6 percent to 89.10 yen, from 90.56. The euro dropped 3.2 percent to 130.24 yen, from 134.54.
Sterling fell for a fourth consecutive week, declining 1.3 percent to $1.6259 on concern the U.K. government’s budget deficit will keep growing as the government spends more money to revive the economy.
Chancellor of the Exchequer Alistair Darling told lawmakers that Britain’s budget deficit will be 611 billion pounds ($990 billion) in the next four years, 5 billion pounds more than previously forecast.
Bank of England
The Bank of England left its main rate at a record low 0.5 percent and maintained its asset-buying program at 200 billion pounds.
The Dollar Index, which the ICE futures exchange uses to track the greenback versus currencies including the euro, yen and pound, increased 0.9 percent to 76.565 this week, from 75.911 on Dec. 4. It touched 76.726 yesterday, the highest level since Nov. 3.
The gauge of the dollar tumbled 5.8 percent this year as signs of global economic recovery led investors to buy higher- yielding assets with amounts borrowed in the greenback. A target lending rate of virtually zero made the dollar popular for funding such transactions.
The trading pattern shifted on Dec. 4, when an unexpected drop in the U.S. unemployment rate to 10 percent pushed the Dollar Index up 1.7 percent. The index increased 0.7 percent on yesterday’s retail and consumer sentiment reports.
“That the dollar strengthened against the euro changes this risk-on, risk-off scenario,” said Andrew Busch, a global currency and public policy strategist at Bank of Montreal in Chicago. The trade “will morph into something else.”
Retail Sales
U.S. retail sales rose 1.3 percent in November after climbing a revised 1.1 percent in the prior month, the Commerce Department reported yesterday. The median forecast of 79 economists in a Bloomberg survey was for a 0.6 percent gain.
The Reuters/University of Michigan preliminary index of consumer sentiment increased to 73.4 for December, compared with 67.4 in the previous month. The median forecast of 71 economists in a Bloomberg survey was for an advance to 68.8.
“I can imagine economic data turning in favor of the U.S. compared with Europe or Japan,” said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York.
The euro fell this week against the yen on speculation the credit ratings of more European nations will be lowered.
Greece and Ireland are in an “intolerable” economic situation that may lead to bailouts and exits from the euro region before the end of 2010, Steve Barrow, head of Group of 10 foreign-exchange strategy in London at Standard Bank, wrote in a research note yesterday.
Spain’s Credit
Spain saw the outlook on its AA+ debt rating cut to “negative” from “stable” by Standard & Poor’s this week. Greece’s credit was reduced one step to BBB+ by Fitch Ratings. Portugal’s outlook was also revised to “negative” from “stable” by S&P.
New Zealand’s dollar advanced 1.2 percent to 72.47 U.S. cents this week after the nation’s Reserve Bank said it will raise borrowing costs sooner than it previously indicated as a stronger housing market helps boost the economy. The official cash rate was held at a record low 2.5 percent.
The Fed will hold the target lending rate at zero to 0.25 percent at the conclusion of its meeting next week, according to all of the 91 economists in a Bloomberg survey.
The U.S. economy faces “formidable headwinds” including a weak labor market and tight credit, Bernanke said on Dec. 7 in a Washington speech.
Mexican Peso Drops
Mexico’s peso posted its biggest weekly decline against the dollar since September, weakening 1.7 percent to 12.8843 on concern the appointment of a new finance minister will weigh on Latin America’s second-largest economy.
President Felipe Calderon said this week that Social Development Minister Ernesto Cordero will replace Finance Minister Agustin Carstens, who was nominated to be the central bank’s governor.
“This is Mexico’s weak spot,” said Win Thin, senior currency strategist at Brown Brothers Harriman & Co. in New York. “It’s another reason to be a bit bearish on the peso.”
To contact the reporters on this story: Ben Levisohn in New York at blevisohn@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net
Last Updated: December 12, 2009 00:01 EST
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