The euro was on track for its worst week versus the dollar in three years Thursday, hurt by tempered expectations of euro zone interest rate hikes even as positive retail data bolstered U.S. rate hike expectations.
Total sales at U.S. retailers rose 1 percent in May as many consumers had more cash from government rebate checks, a report Thursday showed.
Strong consumer spending despite higher gas prices and deteriorating wealth from falling house prices will allow the Federal Reserve more latitude to raise rates to stem inflation.
Higher rates raise the attractiveness of dollar-denominated assets and stoke demand for the dollars to buy them.
"The data is certainly dollar-positive," said David Powell, currency strategist at Bank of America in New York.
"The report shows strength in consumer spending which is probably due to the tax rebate checks. We're seeing the fiscal stimulus coming into the economy and seeing the effect on the retail sales data," he said.
The euro was trading near $1.54. The dollar hit a 3-1/2-month high versus a basket of six major currencies at 74.038.
The dollar gained against the Japanese currency after hitting a high of 108.
The dollar-positive data followed comments from Philadelphia Fed President Charles Plosser Thursday who said current U.S. interest rates are supportive for growth, but the Fed needs to stay vigilant in keeping inflation expectations contained.
That contrasts with comments from European Central Bank President Jean-Claude Trichet last week who opened the door to a July ECB rate hike, but policymakers since then have reiterated his message that this would not be the start of a big monetary policy tightening campaign.
French economy minister Christine Lagarde Thursday went one step further, saying that the ECB may even reconsider the July move after this weekend's G8 meeting.
ECB Executive Board member Lorenzo Bini Smaghi said Thursday the bank will do what is needed to lower inflation but it has given indications on policy moves only as far as July.
Adding pressure on the euro was news of a potential $46.3 billion outflow from euros to dollars as Belgium's InBev—the world's largest beer producer by volume—launched a bid for Anheuser-Busch, the U.S. maker of Budweiser and Michelob.
"The announcement that InBev NV has offered $46.3 billion for Anheuser-Busch Cos weighed on euro/dollar overnight," said RBC Capital Markets in a research note to clients.
To be sure, although the dollar was cashing in on reduced ECB rate hike expectations, some analysts said markets' Fed expectations were also looking overdone with the possibility of three rate hikes priced in by year-end.
Any reassessment of how much the Fed could lift benchmark rates from the current 2 percent later in the year may drive the dollar lower, given the albeit tempered ECB expectations.
"We believe that markets are currently strongly overestimating the likelihood of aggressive tightening by the Fed, as uncertainty regarding growth conditions remains elevated," said UBS in a research note to clients.
In other data, U.S. import prices rose 2.3 percent in May as expected, capping the biggest three-month increase in more than 17 years, as petroleum import prices climbed, a government report showed on Thursday.
The 7.9 percent three-month rise in import prices was the largest since October 1990, the Labor Department said.
The number of U.S. workers filing new claims for jobless benefits rose more than expected last week, the Department said in a separate report.