US dollar retreats from 12-year high on Fed rate resolve questions

NEW YORK (Bloomberg) - After pushing the US dollar to its strongest level in 12 years, the bulls are in retreat. At least for now.

A gauge of the dollar weakened for the first time in seven days as investors assess how the Federal Reserve may adjust the timing of an interest-rate increase when the central bank's policy committee meets next week. The U.S. currency extended losses after a report showed retail sales unexpectedly dropped last month.

"Retail sales have been one of the biggest stumbling blocks for the dollar," said Alfonso Esparza, senior currency analyst in Toronto at Oanda Corp.. "The rally now is on pause and waiting for the Federal Open Market Committee."

The dollar weakened 0.9 per cent to US$1.0637 per euro as of 4:31 p.m. New York time, after touching US$1.0495, the strongest level since January 2003. The U.S. currency was 0.2 per cent lower at 121.27 yen, after climbing to a 7 1/2-year high of 122.03 on Tuesday.

Sales at U.S. retailers decreased in February for a third consecutive month as inclement weather and low wage gains restrained shoppers.

The 0.6 per cent drop followed a 0.8 per cent decrease in January, Commerce Department figures showed. The median forecast of 86 economists surveyed by Bloomberg projected a 0.3 per cent gain.

"It's disappointing" that lower gasoline prices didn't translate into higher U.S. retail sales, said Ben Pace, the New York-based chief investment officer at HPM Partners LLC, which oversees US$5.5 billion of assets. "The markets got a little bit nervous about how quickly the euro and some other currencies around the world were falling."

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, declined 0.4 per cent to 1,212.27, falling from the highest level in data going back to 2004. The gauge had gained for six straight days and is up 7.2 per cent this year.

The 14-day relative-strength index for the dollar gauge has exceeded 70 since March 5, a signal that gains may have become overdone.

With the European Central Bank embarking on its 60 billion euro-a-month bond-buying programme, investors are debating whether the Fed will maintain its pledge to be patient on tightening policy.

"The market's becoming a bit more cautious and there's been a lot of talk these past few days: can the trend continue, are we going to see parity in the next couple of days?" said Thu Lan Nguyen, a strategist at Commerzbank AG in Frankfurt, referring to the euro-dollar rate. "It could just be a correction for now." The Fed "has the potential to cause a serious correction if they're more dovish than many expect," she said.

The euro is poised for its biggest quarterly loss on record against the dollar after ECB President Mario Draghi reiterated Wednesday the central bank's commitment to spurring inflation. Its 12 per cent decline this year, with almost three weeks before the quarter ends, eclipses the 11 per cent slide in the third quarter of 2008.

The ECB's 1.1 trillion-euro quantitative-easing program entered its fourth day Thursday. The Fed's meeting next week comes against a backdrop of reports showing strength in the U.S. labor market, fueling speculation policy makers will lay the groundwork for the first rate increase since 2006.

After the news of the retail sales decline, the odds of a rate boost by the central bank's June meeting were at 19 per cent, compared with 21 per cent Wednesday, according to futures data compiled by Bloomberg.