FOREX-Dollar gains broadly after U.S. retail sales data beat f'cast
* Retail sales posts largest rise since September
* U.S. economy outperforms, lifting dollar sentiment
* Euro hurt by higher Italian bond yields after auction
NEW YORK, March 13 (Reuters) - The dollar rallied to a seven-month high against a basket of currencies on Wednesday after U.S. retail sales data beat expectations, stoking hopes that the U.S. economy is outperforming other advanced markets.
The Commerce Department said on Wednesday that February retail sales increased 1.1 percent, the largest monthly rise since September, after a revised 0.2 percent gain in January.
The dollar index, which tracks the greenback against a basket of currencies, rose to 83.055, its highest since Aug. 3, before pulling back slightly to trade at 82.912, up 0.4 percent on the day.
"Strong activity numbers will help maintain investor expectations that the U.S. economic recovery is best placed amongst G-3 (economies) to begin gaining traction this year," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston, referring to the United States, Europe and China.
Broad dollar strength pushed the euro down 0.6 percent on the day to $1.2950. The single currency had earlier hit a session low of $1.2922, the weakest since Dec. 10.
Trading volume surged, with some $5.27 billion in euros changing hands on Reuters Dealing, compared to a daily average of $4.13 billion over the past five days.
The euro also came under pressure as an Italian debt auction saw weaker demand than previous sales, pushing borrowing costs higher on the country's ongoing political uncertainty.
"The headline yields and the fact they had to pay slightly more than last time was a tad disappointing," said Neil Jones, head of hedge fund FX sales, at Mizuho Corporate Bank. "I can understand the hesitancy (for Italian debt) and that is why the yields are higher and this has weighed on the euro as well."
Against the yen, the euro was down 0.8 percent at 124.25 yen.
The dollar slipped 0.1 percent to 95.95 yen, recouping most losses after the release of strong U.S. retail sales data, not far away from the 3-1/2-year peak of 96.71 yen set on Tuesday, where it had brought its year-to-date gains to more than 10 percent.
Analysts said yen weakness was firmly intact and it 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 signed off 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.
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.
"This flip in risk reversals shows banks' option desks are short of yen calls at a time when their customers want them," said Adam Myers, European head of FX strategy at Credit Agricole.