Dollar leaps as retail data signal a stronger shopper, traders hope for quicker Fed hikes

Dollar leaps as retail data prompt hopes for hike

NEW YORK — The dollar rose Friday to its highest level against the euro since early October as a report showed the holiday shopping season could be brighter than had been anticipated, raising speculation that the Federal Reserve could raise interest rates in the first half of 2010.

The 16-nation euro dropped as low as $1.4587 Friday just before noon, after the Commerce Department said retail sales rose 1.3 percent in November — the biggest gain since August, when the government’s Cash for Clunkers program was still in effect.

That was the euro’s lowest point since Oct. 2. Only last week, the euro was fetching above $1.50.

In late afternoon trading in New York, the euro slid to $1.4617 from $1.4720 late Thursday, while the British pound fell to $1.6241 from $1.6264. The dollar rose to 89.18 yen from 88.20 yen.

“Consumers are feeling more confident,” said Nigel Gault of IHS Global Insight. Consumer spending powers about 70 percent of the U.S. economy and is key to a continued recovery.

Some traders had been thinking the Fed would keep rates at their current record low range near zero until as late as 2011 as unemployment stayed elevated and lending tight. The burst of good data recently on jobs and now retail sales has traders pricing in a greater likelihood of a Fed hike at its June 2010 meeting, said Brian Dolan, currency strategist at Forex.com.

“The Fed’s hand will be forced sooner rather than later,” Dolan said.

Higher interest rates — or the expectation of higher interest rates in the near future — can boost a currency as investors transfer their funds to where they can earn higher returns.

Last Friday, the dollar also got a big boost when the government said the unemployment rate in November dropped back down to 10 percent from 10.2 percent in October.

The Federal Reserve’s rate-setting committee meets next week. Analysts will be watching to see if the Fed changes its language on rates. It has in the past pledged to keep the key federal funds rate at “exceptionally low levels” for an “extended period.”

Many economists think that at next week’s meeting, the Fed will continue to keep rates at record lows as unemployment remains high and inflation subdued.

Dolan also noted that U.S. bond rates have risen after some weak Treasury auctions, meaning Japan now has the lowest effective interest rates. Traders are using the Japanese yen to fund “carry trades” rather than the dollar, he said.

In a carry trade, investors borrow a low-yielding currency, such as the yen or dollar, in order to buy up a currency with high yields or other riskier assets such as commodities.

In other late trading Friday, the dollar moved up to 1.0341 Swiss francs from 1.0266 francs and 1.0606 Canadian dollars from 1.0504 late Thursday.

Lingering worries about the stability of government finances in European countries that use the euro are also helping boost the dollar.