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FOREX -Dollar steadies after two-day fall, eyes on retail sales

Patrick Graham
Tuesday, 14 Jan 2014 | 7:32 AM ET

* Dollar firms against yen, reversing post-payrolls fall

* Euro prodded higher by ECB's Nowotny

* Swedish crown rises after inflation data

LONDON, Jan 14 (Reuters) - The dollar gained more than half a percent against the yen on Tuesday and was a shade lower against the euro, after two sessions that halted a bullish start to 2014 for the U.S. currency.

The Swedish crown gained on the back of higher than expected inflation while the euro was propped up in early trade by an upbeat assessment of Europe's economic prospects from Austrian central bank governor Ewald Nowotny.

Most banks see a strong case for the dollar to rise this year, given the contrasting outlooks for monetary policy in the United States compared with Europe and Japan, whose central banks are still considering more moves to support growth.

That suggests that a sell-off on Wall Street and of the dollar since weak employment data last Friday may just be a corrective pause that clears the way for gains, though the jury is still very much out.

A turning point could be U.S. retail sales figures for December, due at 1330 GMT and forecast to show a rise of just 0.1 percent month-on-month. A strong figure would strengthen expectations of another cut in the volume of dollars the U.S. Federal Reserve pumps into the economy.

"It does look like the recent weakness after the payrolls report is only a temporary setback for the dollar," said Lee Hardman, strategist with Bank of Tokyo Mitsubishi in London.

"A broader range of indicators in the U.S. are consistent with stronger economic growth. Generally we remain positive on the dollar; we believe the U.S. economy will surprise on the upside this year, leading the Fed to increase the pace of its tapering of bond-buying."

The dollar gained 0.58 percent to 103.57 yen, recovering after a more than 1 percent drop on Monday that saw it hit a roughly one-month low of 102.85 yen.

CONFLICTING SIGNALS

The euro touched a two-week high against the dollar in early trade after the Nowotny, a senior player at the European Central Bank, said euro zone growth may surprise on the upside, although strategists cautioned that ran contrary to the concern expressed over the economy by the bank as a whole last week.

"After (ECB President) Mr Draghi's comments last week, Mr Nowotny's comments represent conflicting signals and make one cautious on buying the euro in response," said Valentin Marinov, head of European G10 FX Strategy at Citibank in London.

"There may still be some room for the euro to be squeezed higher but in the medium term we still see the risks to the downside."

Still, euro zone November industrial production numbers also struck a positive note and the euro traded just under 0.1 percent higher on the day at $1.3680.

Sweden's crown, buffeted by contrasting signals on domestic interest rates over the past week, rose sharply after inflation came in above forecasts. 1/2ID:nL6N0KO0WI 3/8 The central bank's minutes last week had been read by some as leaving the door open to one more cut in interest rates.

"The Riksbank stated an eight percent likelihood of a further (rate) cut in Q1 2014," Anna Raman, economist at Nykredit, said. "After today's outcome that probability should be negligible."