Markets: News  

Dollar falls after weak U.S. retail sales

SAN FRANCISCO (MarketWatch) -- The U.S. dollar's decline Monday, after a report showed retail sales fell, raised concerns among traders that the Federal Reserve would respond by pumping more money into the financial system.

The dollar index (DXY) , which tracks the U.S. currency against six major currencies, turned down after the data to 83.088 at market close in North America. The dollar closed Friday at 83.349.

Against the Japanese yen, the dollar (USDJPY) further declined, closing the day at ¥78.84 -- its lowest since early June and down from ¥79.27 late Friday.

The euro (EURUSD) rose, closing at $1.2274 Monday, up from $1.2246 Friday. It hit a low of $1.2174 before the data, just above a two-year low touched last week. Read more on Friday's currency trading.

U.S. retail sales fell 0.5% in June, the Commerce Department said. It's the third consecutive month of slowing sales, the weakest run since the second half of 2008, during the Great Recession. See story on retail sales.

"We are looking at a very weak third quarter GDP that will show minimal improvement in growth," said Kathy Lien, managing director of FX Strategy at BK Asset Management. "This morning's U.S. consumer spending report hardens the case for QE3" -- a nickname for a third round of quantitative easing -- bond purchases -- by the Federal Reserve.

While some analysts and investors say bond purchases are likely coming later this year, Steven Englander, head of G-10 strategy at Citigroup, disagreed.

"I don't think we're there yet," he said. The move on Monday was probably triggered by traders heavily positioned for the euro to fall further having to reverse those bets.

Central-bank bond purchases are designed to increase the availability of funding in the financial system but are seen by many as devaluing a country's currency.

Spanish bondholders

The dollar was up versus the euro before the U.S. data, with analysts focused on a Wall Street Journal report that the European Central Bank, in a major reversal, has advocated imposing losses on holders of senior bonds issued by Spain's most troubled banks, although finance ministers have rejected such a move. Read about the ECB's shift

When it comes to the euro, "the market is short, and bearish and very comfortable. We don't like being consensus but there is little point being contrarian just for the sake of it, and with the ECB warming to the idea of 'burden-sharing' by the bondholders of rescued banks, there remains no good news for the euro," wrote Kit Juckes, head of foreign exchange at Société Générale, in a note.

The main event for the week will be U.S. Federal Reserve Chairman Ben Bernanke's semiannual testimony to Congress, slated for Tuesday and Wednesday.

Englander has mild expectations.

"There's a limit to what [Bernanke] can say," he notes. "He's not going to commit the Fed to anything."

Barclays analysts said the greenback is likely to gain unless the Fed chief suggests fresh policy-easing moves are coming soon.

"Chairman Bernanke is not likely to give an indication that further easing is imminent. That added to negative earnings surprises in the U.S. may weigh on risk sentiment in the near term, boosting the [U.S. dollar] more broadly," they said in a note.

Strategists at Crédit Agricole said that even if Bernanke did sound a dovish note during the testimony, the dollar could make gains anyway because more accommodation has been priced in already.

"To the contrary, the outlining of additional Fed stimulus options could work to the [dollar's] benefit, given currently heightened levels of investor risk aversion surrounding Europe," they said, in terms of the dollar's value against the euro.

Among other major currency pairs, the British pound (GBPUSD) turned closed Monday to buy $1.5633 compared with $1.5570 late Friday.

The Australian dollar (AUDUSD) also closed Monday trading at $1.0235 up from $1.0234.