The U.S. dollar rallied broadly Tuesday after a report on April retail sales beat forecasts and supported views that the Federal Reserve will probably stop cutting interest rates next month.
Retail sales, excluding the hard-pressed autos sector, increased 0.5 percent, more than double the increase that economists had forecast. That followed a 0.4 percent pickup in March, suggesting that the U.S. consumer remained resilient despite the housing market rout.
The reading bolstered the dollar as consumer spending accounts for about two-thirds of the U.S. economy.
"The U.S. consumer is out there and still spending," said Kurt Karl, a U.S. chief economist at Swiss Re in New York. "As for the Fed, given the recent data, it wouldn't be a bad thing to stop for a while at 2 percent."
The euro dropped earlier to a session low of $1.5431. In late trading, it was down 0.4 percent at $1.5479. The New York Board of Trade's dollar index, which tracks the dollar's performance against a basket of currencies, rose 0.4 percent to 73.246.
Short-term interest rate futures, which track market expectations for Fed policy, showed a 92 percent perceived chance that the central bank would leave benchmark lending rates unchanged next month.
The fed funds target rate has been lowered by 3.25 percentage points since mid-September 2007, undermining the dollar's appeal to investors seeking higher returns.
"Today we saw the strength of the consumer with retail sales being better than what the market expected, especially in household goods, which shows us consumers are still resilient," said Boris Schlossberg, senior currency strategist at DailyFX.com in New York.
"That will provide a floor underneath Fed rates for the time being and benefit the dollar as we go forward," he added.
San Francisco Federal Reserve Bank President Janet Yellen said on Tuesday the current level of U.S. interest rates should boost the economy in the second half of the year.
Credit Agricole Hurts Euro
Sentiment toward the euro was also soured by a rights issue from France's Credit Agricole after it reported write-downs related to the U.S. subprime mortgage sector.
This indicated the euro zone is not immune to the problems in the United States and analysts are convinced that growing signs of a slowdown in economic activity in the euro area will force the European Central Bank to cut interest rates at some point this year.
Analysts said euro/dollar faced support around $1.5260 in the near term, adding more bad news out of the euro zone would be needed for a break below that level, which could see the currency pair making stabs at $1.50.
Against the yen, the dollar jumped to a session high of 104.92 yen. It was last trading at 104.77 yen, up 1 percent on the day and shrugging off mixed U.S. shares.
Analysts said the dollar had also been boosted by a government report showing a slight rise in U.S. import prices in April, which pointed to growing inflationary pressures.
"One thing that the market has not focused on, but will, when it comes to interpreting Fed policy is the import prices that are up sharply. Inflation is firmly becoming rooted," said Axel Merk, portfolio manager at Merk Hard currency in Palo Alto, California.
"Cutting rates further is not going to boost the economy much, it's going to foster further inflationary pressures," he added.
Import prices rose 1.8 percent in April.
The market was little moved by Fed Chairman Ben Bernanke's comments that the central bank's liquidity measures had helped relieve strain in financial markets, but that the recovery process remained incomplete.