FOREX-Dollar up on retail data, euro off on rate outlook

FOREX-Dollar up on retail data, euro off on rate outlook

(Recasts, updates prices, adds comment, byline)

* Dollar rally gathers steam, index at 3-1/2-month high

* Euro heads for biggest weekly loss vs dollar in 3 years

* ECB rate hike outlook tempered by Lagarde, Smaghi

By Steven C. Johnson

NEW YORK, June 12 (Reuters) - The dollar rallied broadly on Thursday after data showed a surprisingly strong gain in U.S. retail sales last month, boosting expectations that the Federal Reserve may raise interest rates this year.

The euro, meanwhile, was on track for its biggest weekly decline against the dollar in three years, buffeted by comments from officials that suggested the European Central Bank was not about to embark on an extended period of monetary tightening.

The greenback got a boost from data showing total sales at U.S. retailers rose 1 percent in May as consumers used government rebate checks to support spending at a time of high gas prices and falling housing prices. For more see [ID:nN11255522].

"The data is certainly dollar-positive," said David Powell, currency strategist at Bank of America in New York. "The report shows strength in consumer spending which is probably due to the tax rebate checks. We're seeing the fiscal stimulus coming into the economy and seeing the effect on retail sales data."

Late afternoon in New York, the euro was down 0.8 percent at $1.5421, on track for its biggest weekly loss in percentage terms since early June 2005.

The dollar hit a 3-1/2-month high versus a basket of six major currencies at 74.038 <.DXY> and added 1 percent against the Japanese currency to 107.90 yen , near a session peak of 108.08, the highest since late February.

"Despite record high crude oil prices and rising expectations of an ECB rate hike later this summer, the dollar bottom appears to have been put in with the U.S. economy recovering and the Federal Reserve preparing to raise rates itself," said Bank of New York Mellon senior currency strategist Michael Woolfolk in New York.

Philadelphia Fed President Charles Plosser was the latest monetary policy official to hint at the possibility of higher U.S. interest rates. On Thursday, he said current U.S. monetary policy was supportive for growth but the Fed needs to stay vigilant in keeping inflation expectations contained.

Fed Chairman Ben Bernanke last week linked the weak dollar to import price inflation, sparking expectations that benchmark rates could rise from the current 2 percent this year.

ECB CONTRAST

ECB President Jean-Claude Trichet last week also opened the door to a July rate hike, but policymakers since then have reiterated his message that this would not be the start of a big monetary policy tightening campaign.

French economy minister Christine Lagarde on Thursday went one step further, saying that the ECB may even reconsider the July move after this weekend's G8 meeting [ID:nPAB004122].

ECB Executive Board member Lorenzo Bini Smaghi said on Thursday the bank will do what is needed to lower inflation but it has given indications on policy moves only as far as July.

Adding pressure on the euro was news of a potential $46.3 billion outflow from euros to dollars as Belgium's InBev -- the world's largest brewer by volume -- launched a bid for Anheuser-Busch , the U.S. maker of Budweiser and Michelob [ID:nL12592065].

"The announcement that InBev NV has offered $46.3 billion for Anheuser-Busch Cos weighed on euro/dollar overnight," said RBC Capital Markets in a research note to clients.

Although the dollar was cashing in on reduced ECB rate hike expectations, some analysts said markets' Fed expectations were also looking overdone with the possibility of three rate hikes priced in by year-end .

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