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* Dollar rally gathers steam, index at 3-1/2-month high
* Euro heads for biggest weekly loss vs dollar in 3 years
* ECB rate hike outlook tempered by Lagarde, Smaghi
By Steven C. Johnson
NEW YORK, June 12 (Reuters) - The dollar rallied broadly on
Thursday after data showed a surprisingly strong gain in U.S.
retail sales last month, boosting expectations that the Federal
Reserve may raise interest rates this year.
The euro, meanwhile, was on track for its biggest weekly
decline against the dollar in three years, buffeted by comments
from officials that suggested the European Central Bank was not
about to embark on an extended period of monetary tightening.
The greenback got a boost from data showing total sales at
U.S. retailers rose 1 percent in May as consumers used
government rebate checks to support spending at a time of high
gas prices and falling housing prices. For more see
"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 retail sales data."
Late afternoon in New York, the euro <EUR=> was down 0.8
percent at $1.5421, on track for its biggest weekly loss in
percentage terms since early June 2005.
The dollar hit a 3-1/2-month high versus a basket of six
major currencies at 74.038 .DXY and added 1 percent against
the Japanese currency to 107.90 yen <JPY=>, near a session peak
of 108.08, the highest since late February.
"Despite record high crude oil prices and rising
expectations of an ECB rate hike later this summer, the dollar
bottom appears to have been put in with the U.S. economy
recovering and the Federal Reserve preparing to raise rates
itself," said Bank of New York Mellon senior currency
strategist Michael Woolfolk in New York.
Philadelphia Fed President Charles Plosser was the latest
monetary policy official to hint at the possibility of higher
U.S. interest rates. On Thursday, he said current U.S. monetary
policy was supportive for growth but the Fed needs to stay
vigilant in keeping inflation expectations contained.
Fed Chairman Ben Bernanke last week linked the weak dollar
to import price inflation, sparking expectations that benchmark
rates could rise from the current 2 percent this year.
ECB President Jean-Claude Trichet last week also opened the
door to a July 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 on Thursday went
one step further, saying that the ECB may even reconsider the
July move after this weekend's G8 meeting [ID:nPAB004122].
ECB Executive Board member Lorenzo Bini Smaghi said on
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
(INTB.BR: Quote, Profile, Research, Stock Buzz) -- the world's largest brewer by volume -- launched a
bid for Anheuser-Busch (BUD.N: Quote, Profile, Research, Stock Buzz), the U.S. maker of Budweiser and
"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.
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 FEDWATCH.
(Additional reporting by Nick Olivari; Editing by James