Dollar and yen gain on renewed safe-haven bid

NEW YORK (Reuters) - The dollar and yen both gained on Tuesday after disappointing U.S. retail sales data and investor caution about corporate earnings boosted safe-haven flows into the two currencies.

The euro and currencies that carry higher interest rates such as the Australian and New Zealand dollars, which tend to benefit when there is risk appetite in the market, came under pressure as risk aversion rose.

The dollar dropped below 99 yen to its lowest since the beginning of April as U.S. stocks fell on news of an unexpected decline in sales at U.S. retailers in March, damping down recent optimism over apparent signs of economic recovery.

The retail sales data "was a big disappointment and (market) sentiment turned on the back of that and has never really recovered," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto, adding:

"The currency that most benefited from this return of risk aversion was the yen."

Despite a better-than-expected profit from Goldman Sachs (GS.N), analysts said investors also remained cautious ahead of earnings announcements due this week from Citigroup (C.N), JP Morgan Chase (JPM.N) and General Electric (GE.N).

Strauss said given the expectations that have been built into the markets, "the risk is now more skewed to a sharp market reaction if those results disappoint."

"Disappointing economic data and earnings results would see risk aversion returning, which would provide further support for first the yen and second the U.S. dollar," he added.

In late afternoon New York trade, the euro fell 0.7 percent to $1.3269 and 1.9 percent to 131.17 yen, close to the session low against the yen of 131.02 yen.

Traders said technical factors also pressured the euro after it failed to extend gains on Monday that took it close to $1.34 against the dollar, its highest in nearly a week.

The dollar fell as low as 98.75 yen, according to Reuters data, and last traded down 1.2 percent at 98.85 yen.

The Australian dollar fell 1 percent to $0.7231 and the New Zealand dollar lost 1.5 percent to $0.5823, reversing Monday's gains.

RETAIL SALES

Earlier, a government report showed sales at U.S. retailers unexpectedly fell 1.1 percent in March, snapping two months of increases. Analysts polled by Reuters had forecast retail sales rising 0.3 percent.

The dismal number further fueled worries about a shaky global economy and helped reverse some of the recent positive sentiment in markets.

"The data shows that expectations that the U.S. economy has bottomed were overdone," said Omer Esiner, forex market analyst at Ruesch International in Washington. It "reintroduced some risk."

Risk sentiment had improved remarkably in recent sessions, buoyed by a five-week rally in U.S. stocks and growing hopes that the global economy may be past the worst of its decline.

But analysts said that while the Goldman earnings report encouraged sentiment toward the financial sector, the market will need more positive news to continue its rebound.

"The follow-through after the Goldman announcement has been on the disappointing side, providing one hint that the risk revival is in need of some fresh oxygen, something the latest retail sales data will not provide," Alan Ruskin, chief international strategist at RBS Greenwich, in Greenwich, Connecticut, wrote in a note.

President Barack Obama said on Tuesday his economic measures were starting to work, with moves to recapitalize banks, strengthen the housing market and rescue the auto sector "necessary pieces of the recovery puzzle."

Separately, Federal Reserve Chairman Ben Bernanke said on Tuesday the U.S. dollar remained the main currency of reserve holding and international transactions and that this was unlikely to change in the foreseeable future.

(Additional reporting by Vivianne Rodrigues and Wanfeng Zhou; Editing by James Dalgleish)