The Shadow
NEW YORK (AP) – The dollar rose Friday to its highest level against the euro since early October as a report showed the holiday shopping season could be brighter than had been anticipated, raising speculation that the Federal Reserve could raise interest rates in the first half of 2010.
The 16-nation euro dropped as low as $1.4609 Friday morning after the Commerce Department said retail sales rose 1.3 percent in November – the biggest gain since August, when the government’s Cash for Clunkers program was still in effect.
That was the euro’s lowest point since Oct. 2.
Some traders had been thinking the Fed would keep rates at their current record low range near zero until as late as 2011. The burst of good data recently on jobs and now retail sales, signaling a more confident consumer, has traders pricing in a greater likelihood of a Fed hike at its June 2010 meeting, said Brian Dolan, currency strategist at Forex.com.
“The Fed’s hand will be forced sooner rather than later,” Dolan said.
Higher interest rates can boost a currency as investors transfer their funds to where they can earn higher returns.
He also noted that U.S. bond rates have risen after some weak Treasury auctions, meaning Japan now has the lowest effective interest rates. Traders are using the Japanese yen to fund “carry trades” rather than the dollar, he said.
In a carry trade, investors borrow a low-yielding currency, such as the yen or dollar, in order to buy up a currency with high yields or other riskier assets such as commodities.
In midmorning trading Friday, the euro dropped to $1.4616 from $1.4720 late Thursday, while the British pound fell to $1.6212 from $1.6264. The dollar rose to 89.70 yen from 88.20 yen.
The dollar also moved up to 1.0355 Swiss francs from 1.0266 francs and 1.0536 Canadian dollars from 1.0504 late Thursday.
Lingering worries about the stability of government finances in European countries that use the euro are also helping boost the dollar.
