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Friday October 13, 2006 - 21:53:29 GMT
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FOREX-Dollar rallies, buoyed by strong sentiment survey

FOREX-Dollar rallies, buoyed by strong sentiment survey
Fri Oct 13, 2006 4:26pm ET

(Updates prices, adds comment)

By Steven C. Johnson

NEW YORK, Oct 13 (Reuters) - The dollar hit a six-month high against the Swiss franc and a near three-month peak versus the euro on Friday after a series of U.S. data further dashed expectations of a central bank rate cut in the near future.

The euro dropped below $1.25 for the first time since mid-July after the University of Michigan's consumer sentiment index posted a surprisingly large rise in October.

That added to gains the dollar made after an earlier report showed rising sales for clothing and at department stores in September, a good omen for the holiday shopping season and the overall spending appetite of the U.S. consumer.

That left the U.S. currency firmer against other major currencies for the second straight week as market sentiment shifted decidedly in favor of the greenback.

"These two numbers - consumer sentiment and retail sales, combined with the revisions to nonfarm payrolls from last week are dollar supportive straight down the line," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey.

"They have squashed speculation about Federal Reserve rate decreases, and you have to concede the possibility of the Fed actually raising rates again."

Late afternoon, the dollar was up 0.4 percent at 1.2735 Swiss francs , near a six-month peak at 1.2771 francs. The euro fell to $1.2484, its lowest in nearly three months, on electronic trading system EBS before recovering to $1.2508, which was still off 0.4 percent.

Traders said a cluster of large automatic sell orders for the euro were waiting around $1.2480, and that a breach of this level would likely open the floodgates for more dollar gains.

The U.S. currency was at 119.66 yen , up 0.3 percent and in sight of the 120 mark, another key technical level. The yen had posted fleeting gains earlier after Bank of Japan Governor Toshihiko Fukui said he could not rule out another rise in Japanese interest rates this year.


The dollar initially fell after the government said overall U.S. retail sales fell 0.4 percent in September, upsetting forecasts for a modest rise.

However, the currency quickly reversed course as traders latched on to the fact that the main reason for the weak overall figure was a drop in gasoline prices, while clothing and department store sales actually rose last month. For details, see [ID:nN13340644]

"The negative headline print is a red herring," said Michael Woolfolk, senior currency strategist at The Bank of New York. "When you strip out gas, sales are up a very smart 0.6 percent month-on-month. What consumers were saving at the gas station, they were spending at the shopping malls."

Woolfolk said investor positions in favor of the dollar should hold at least until the market sees the September consumer price data due on Wednesday. He added that a strong reading there could catapult the dollar above 120 yen and spark a convincing break below $1.2460 in the euro-dollar rate.

The market will also get more Fed comments to digest, including some from chairman Ben Bernanke.

Federal funds futures are now pointing to a very slim chance that the Fed will raise interest rates by the end of the year, resuming a tightening campaign that the central bank halted in August after two years of consecutive rate rises.

But Todd Elmer, currency strategist at Citigroup Global Markets in New York, noted that euro zone interest rates are still expected to rise while the Fed should be on hold for some time.

"The euro-dollar has been trading lower than the level suggested by interest rate spreads, and there's a real risk that we see a correction higher," he said.

(Additional reporting by David McMahon)

© Reuters 2006. All Rights Reserved.


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