Retailers fuel burst of dollar strength

The dollar hit a one-month high against the yen on Wednesday after an unexpected rise in US retail sales.

Figures revealed US sales rose 0.3 per cent in January, confounding expectations for a 0.3 per cent fall.

Michael Woolfolk at Bank of New Mellon said the report implied US consumers might be in better shape than previously thought and the Federal Reserve's aggressive interest rate cuts in January might indeed succeed in averting a US recession. "The implication for the dollar is undeniably positive," he said.

By midday in New York, the dollar rose 0.8 per cent to Y108.20 against the yen, climbed 0.2 per cent to $1.4550 against the euro and gained 0.5 per cent to SFr1.1070 against the Swiss franc.

However, the dollar was flat at $1.9610 against the pound as the Bank of England's quarterly Inflation Report tempered expectations for aggressive cuts in UK interest rates.

The Bank said its projections for UK consumer price inflation were higher than in its November report, particularly in the near-term because of sharp rises in food, energy and import prices. It said consumer price inflation could well rise higher than 3 per cent - far above the central bank's 2 per cent target - in the short term if rates fell as expected.

Analysts said the projections suggested the Bank of England believed UK interest rates could fall by 50 basis points to 4.75 per cent in the coming months, but that expectations of a 75 basis-point cut might be overdone.

"The Bank of England believes the market has got a little ahead of itself on rate cut expectations," said James Knightley at ING.

However, he said he still believed that the deteriorating global backdrop would further damp price pressures. He said weaker domestic demand would lead to UK inflation dropping well below 2 per cent in 2009.

"Consequently, we retain our view that the Bank of England will be cutting rates to 4.5 per cent by the fourth quarter of this year, with the risks skewed to policy-easing coming earlier rather than later," said Mr Knightley.

The pound rose 0.2 per cent to £0.7421 against the euro and gained 0.8 per cent to Y212.10 against the yen.

Meanwhile, the Swedish krona rose 0.5 per cent to SKr9.3540 against the euro and climbed 0.3 per cent to SKr6.4250 against the dollar after a surprise rise in Swedish interest rates.

The Swedish central bank, raised interest rates by 25 basis points to 4.25 per cent. It justified the rise based on a 14-year high in inflation and solid economic activity but also hinted that this would be the last rate rise of the current cycle. The move wrong-footed analysts, who were expecting increased worries over global growth to keep the Swedish authorities from acting.