The dollar rose to 4-1/2 month highs against the euro and a one-month peak versus the yen on Wednesday, benefiting from a run of strong U.S. data that has investors eyeing further short-term gains for the greenback. Markets looked to U.S. consumer price data due at 1230 GMT to add to debate about when U.S. interest rates could rise from 1.0 percent after a faster than expected March retail sales rise reported during the previous session. Tuesday's data, coming on the back of a surprisingly strong employment report at the start of April, bolstered market suspicions that U.S. borrowing costs are set for a hike, though investors still wondered how far this could take the dollar. "Strong retail sales figures yesterday tended to bring forward expectations of a rate hike in the United States and that's one of the reasons why the dollar has been strong this morning," said Mark McFarland, currency strategist at UBS. "This is really a critical level from a technical perspective. From a fundamental perspective we should actually start to see it going the other way but it really depends on whether we see it going down below $1.18 for a sustained period." By 1135 GMT, the dollar traded a quarter of a percent higher on the day at $1.1916 after reaching a peak of $1.1893. The greenback rose more than one percent against the yen to 107.89 .
It had also climbed two percent percent on the New Zealand dollar, nearly two percent against the Australian dollar and one percent on sterling, all higher yielding currencies which analysts see as potentially vulnerable to a dollar turnaround. "We are still coming off the payrolls and the strength of the retail sales numbers yesterday. The remaining data this week all look like they are going to be fairly upbeat as well, so the dollar is benefiting from that," said Mitul Kotecha, head of global foreign exchange research at Credit Agricole Indosuez. "I think the euro could head down towards $1.17, possibly even lower in the next few weeks. But further out there is still the risk that fundamental structural problems could come back to haunt the dollar."
DATA KEY FOR DOLLAR
Economists have forecast a 0.3 percent increase in U.S. March consumer prices and a 0.2 percent rise in the core prices. U.S. trade data is also scheduled for 1230 GMT. Economists expect the deficit to have narrowed to $42.5 billion in February from January's $43.06 billion as a weaker dollar supported a rise in exports but increased the price of oil and made imports more expensive. In addition to Tuesday's retail sales figures, February U.S. business inventories rose 0.7 percent, higher than expected and signalling stronger than expected economic growth. Firm U.S. data again on Wednesday could further increase bets that the Federal Reserve would move earlier to lift rates from a 46-year low of one percent. Futures markets now see a good chance of a quarter-point hike by August. Ian Gunner, head of foreign exchange research at Mellon Financial Corporation, said the dollar could move toward $1.10 to $1.15 per euro in the next two or three months, particularly if next month's employment report again indicates the U.S. labour market is recovering. "At the moment people are starting to discount rate hikes in the future," said Gunner. "I think the dollar has turned for this year. The longer term trend will ultimately depend on the balance of payments background and that remains unhealthy," said Gunner. Elsewhere, U.S. Vice President Dick Cheney, meeting top Chinese officials in Beijing, urged China to let financial markets determine the value of the yuan, becoming the latest in a long line of American officials to press Beijing on currency reform. However, Premier Wen Jiabao told Cheney the current value of the yuan currency was in line with the country's level of development, a foreign ministry spokeswoman said. China has resisted pressure to revalue, saying it wants to make the yuan more flexible in its own time.///www.reutres.com