Dollar supported by data, Fed, stress test result

SYDNEY Tue Mar 13, 2012 6:44pm EDT

A picture illustration shows a 100 Dollar banknote laying on one Dollar banknotes, taken in Warsaw, January 13, 2011. REUTERS/Kacper Pempel

A picture illustration shows a 100 Dollar banknote laying on one Dollar banknotes, taken in Warsaw, January 13, 2011.

Credit: Reuters/Kacper Pempel

SYDNEY (Reuters) - The dollar was broadly firmer early in Asia on Wednesday, having hit a seven-week high against a basket of major currencies as prospects for further easing by the Federal Reserve faded in the wake of more upbeat U.S. data.

Also providing risk-takers some comfort, the Fed's annual stress test showed the majority of the largest U.S. banks passed.

The dollar index climbed as high as 80.320 .DXY, before giving back a bit of ground to last trade at 80.123, up 0.3 percent. It rose to an 11-month high of 83.08 yen, while the euro fell to a one-month low of $1.3050.

The euro was last at $1.3076, with support seen at $1.3054, the 50 percent retracement of the Jan 16-Feb 24 rally. The single currency is seen capped at $1.3120/30, where sell orders were said to be lurking.

Further shoring up the dollar, U.S. Treasury yields jumped to multi-month highs in the wake of strong retail sales data, making the greenback less attractive as a funding currency for carry trades.

In contrast, the Japanese currency remained on the backfoot as expectations for further easing by the Bank of Japan persisted even after the central bank held policy steady on Tuesday.

Hot on the heels of Friday's encouraging U.S. jobs report, a strong 1.1 percent rise in retail sales provided fresh evidence of improvement in the world's largest economy.

Acknowledging this trend, the Fed gave a slightly more optimistic outlook after leaving rates unchanged at its policy meeting.

"There is nothing for risky assets not to love about the Fed stance; either the economic outlook will continue to improve, or the Fed will take action to inject more liquidity into markets," said Julia Coronado, BNP Paribas chief economist for North America.

The brighter mood was also reflected in equity markets, with the S&P 500 index .SPX closing at highs not seen since June 2008. The inverse relationship between the dollar and equity markets has all but broken down and analysts expect this can persist.

"A more upbeat Fed coupled with a continuation of strong economic data out of the United States could lead to an occurrence rarely seen in recent years: a rally by equity markets and the U.S. dollar simultaneously over the next few weeks," said Christopher Vecchio, currency analyst at DailyFX.

In the past, investors tended to sell the dollar to buy higher-yielding assets on any upside surprise in key U.S. data. Now, strong numbers are seen as lengthening the odds of more action from the Fed, which is positive for the dollar.

This also means that commodity currencies like the Australian dollar might struggle against the greenback even as other risk assets rally.

The Aussie, which rose against the euro and yen overnight, found the going much tougher against the greenback. It drifted up a touch to $1.0544, pulling away from a seven-week trough of $1.0473 plumbed on Monday.

There is little in the way of market moving data out of Asia on Wednesday. In Europe, euro zone industrial production for January and inflation data for February are due later in the day.

(Editing by Wayne Cole)

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