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Dollar Index Hits 7-Month High on Strong US Retail Data

Don Farrall | Photographer's Choice RF | Getty Images

The dollar climbed to a seven-month high against a basket of currencies and a three-month peak against the euro on Wednesday as robust U.S. retail sales data bolstered prospects for the world's largest economy.

The greenback has risen nearly 4 percent against a currency basket and about 1.8 percent versus the euro so far this year. It has outperformed most major currencies in 2013.

The U.S. retail sales data was the latest evidence that the economy is firing on almost all cylinders. The Commerce Department said February retail sales increased 1.1 percent, the largest monthly rise since September.

"The growing dichotomy between the ever-improving U.S. economic picture and the moribund conditions in the euro zone has finally pushed the euro through the $1.2950 key support level against the dollar," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

(Read More: Bank of Japan Holds Fire, Braces for New Leadership)

The dollar index rose to 83.055, its highest since Aug. 3, before pulling back slightly to trade at 82.90, up 0.4 percent on the day.

Broad dollar strength pushed the euro down 0.5 percent on the day to $1.2966. The single currency had earlier hit a session low of $1.2922, the weakest since Dec. 10. It was the second straight losing day for the euro.

Trading volume surged, with $5.34 billion in euros changing hands on Reuters Dealing, compared with a daily average of $4.13 billion over the past five days.

The euro also came under pressure as an Italian debt auction drew weaker demand than previous sales, pushing borrowing costs higher on the country's political uncertainty.

Against the yen, the euro was down 0.5 percent at 124.61 yen.

The dollar was flat against the yen at 96.07 yen, recouping most losses after the strong U.S. retail sales data. The U.S. currency was also not far away from the 3-1/2-year peak of 96.71 yen set on Tuesday, which brought its year-to-date gains to more than 10 percent.

Analysts said yen weakness was firmly intact and the currency would continue to trend lower after Haruhiko Kuroda, a dovish former finance ministry official and so-called currency czar, takes over as the Bank of Japan's next chief.

Kuroda, whose nomination along with Kikuo Iwata and Hiroshi Nakaso as deputy governors, is expected to be approved by Japan's parliament later this week. All have vowed to pursue radical measures to lift Japan's inflation rate to 2 percent—something that has not happened for nearly two decades.

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But in a telling sign that the relentless selling pressure on the yen since last November may be easing, risk reversals, or put and call options, flipped toward yen calls, or bets that the currency will gain.

The one-month risk reversal was traded at 0.1 vols in favor of yen calls, flipping from around 0.5 in favor of yen puts just last week. The three-month risk reversal and the one-year were also showing a bias for yen strength.

"It dovetails well with our view that 'Abenomics' is now largely discounted and the short yen story is well-known and now a crowded trade," said Marc Chandler, global head of FX strategy at Brown Brothers Harriman in New York. "Simply put, this is an early sign that the yen shorts may be getting nervous."

Abenomics refers to policies of Japanese Prime Minister Shinzo Abe, who favors an aggressive easing policy to lift the country from deflation.

The Reserve Bank of New Zealand late on Wednesday kept its official cash rate unchanged at 2.5 percent, citing an uneven domestic recovery. The bank said it did not expect to raise interest rates this year.

RBNZ Governor Graeme Wheeler, meanwhile, said the New Zealand dollar was overvalued, which has undermined profitability in the export and import-competing industries.

The New Zealand dollar fell in the immediate aftermath of the RBNZ statement, falling to session lows at US$0.8196. It was last at US$0.8205, up 0.8 percent on the day.

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