Swiss Rate Decision, Easing Oil Cheers Dollar

The dollar rose Thursday, buoyed by a sharp drop in crude oil prices and a decision by the Swiss National Bank to keep interest rates steady despite record-high inflation.

Sterling, meanwhile, rose to its highest level in over a week against the dollar and rallied versus the euro after strong British retail sales raised speculation the Bank of England might hike British borrowing costs from 5 percent.

"Oil is coming off and that has helped the dollar. We have news that China will raise diesel prices and that has helped put offers on crude," said Matt Kassel, director of foreign exchange trading at ING Capital Markets in New York.

Higher oil prices have weighed on the dollar on views they would stifle economic growth in the United States, the world's largest consumer.

"In terms of the euro, euro/sterling was sold aggressively after the release of UK retail sales, which were off the charts. That fueled a sell-off in euro/dollar as well," Kassel said.

In New York morning trade, the euro was down versus the dollar, after sliding to as low as $1.5467 in overnight trade.

The dollar was flat against the yen .

"The UK news has sent sterling higher, driving the sterling crosses. That's one of the major undercurrents today. Oil is down, that also is dollar positive there," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.

"We are still within recent ranges. The dollar is not out of the woods yet."

U.S. crude futures tumbled sharply after news China will raise gasoline and diesel prices.

Fuel subsidies have helped propel China's demand and supported a 6-year rally in crude oil that has sent prices up nearly seven-fold, fueling inflation pressures globally while at the same time threatening growth.

A report showing factory activity in the U.S. Mid-Atlantic region slowed further in June, briefly caused the dollar to pare gains.

Rising money market rates and growing inflationary pressures had led a significant minority of investors to expect a SNB rate rise from 2.75 percent.

Analysts said that investors might see the SNB decision as a reason to scale back expectations for European Central Bank rate rises after an expected increase in July.

Against the Swiss franc, the dollar rose 0.8 percent to 1.0452 francs, reversing earlier losses made in the run-up to the SNB decision.

The franc also fell half a percent versus the euro .

Sterling spiked after a shock rise in British retail sales, which highlighted inflationary anxiety among investors.

It also climbed against the euro, pushing the single currency down.