* U.S. July consumer spending rises at fastest pace in seven
* Yen down on Nikkei report on corporate tax cut
NEW YORK Aug 13 The dollar rallied to a
one-week high against both the euro and yen on Tuesday after a
key gauge of U.S. consumer spending rose at its fastest pace in
seven months, strengthening expectations for the Federal Reserve
to wind down its stimulus.
Retail sales outside of cars, gasoline and building
materials rose 0.5 percent last month, the Commerce Department
said on Tuesday. The gain in July was the biggest since December
and suggests the U.S. economy could be regaining steam after tax
hikes and federal budget cuts dragged on growth in the first
half of the year.
Robust economic data will encourage the U.S. central bank to
trim its estimated $85 billion in monthly bond-buying purchases,
perhaps as early as September.
The yen posted its biggest percentage loss against both the
dollar and euro in two weeks after a newspaper report indicated
Japan's government may cut corporate taxes.
The euro had earlier climbed against the dollar and jumped
against the yen after a stronger-than-expected ZEW sentiment
survey in Germany added to optimism that a euro zone recovery is
picking up pace.
"For the next five and a half weeks, every U.S. statistic
will be measured by its impact on the September 18th (Federal
Open Market Committee) decision," said Joseph Trevisani, chief
market strategist at WorldWideMarkets in Woodcliff Lake, New
"By that standard today's number should keep the Fed on
track to curtail quantitative easing purchases in September," he
The euro was last down 0.4 percent at $1.3242 with the
session low at $1.3232. The dollar was last up 1.1
percent at 97.99 yen. Only last week the dollar was at a
seven week low against the yen.
The euro last traded up 0.7 percent at 129.77 yen.
The euro hit a session high against the dollar at $1.3316
after the German ZEW survey was released.
The investor sentiment index, which showed economic
conditions improved in August from July, follows last week's
German industrial output in June, which surged to its fastest
pace in nearly two years.
"The euro is reacting to stronger-than-expected data, but we
are not expecting it to go much higher until the central bank is
prepared to change its policy stance," said UBS currency
strategist Geoffrey Yu in London after the report.
The European Central Bank (ECB) has pledged to keep policy
accommodative and is even prepared to lower interest rates to
support an economic recovery. That contrasts sharply with the
signals from the Fed.
The euro zone currency has also drawn some support from
signs of stabilization in the bloc's economy in recent weeks
with yield differentials between U.S. Treasuries and
German Bunds narrowing for much of this month.
Euro zone gross domestic product data due on Wednesday is
expected to show the region emerged from recession in the second
The yen was weak across the board after a report in business
daily Nikkei, which said Japan Prime Minister Shinzo Abe is
considering a corporate tax cut as a way to offset the potential
economic drag of a planned hike in sales tax.
Investors who have been betting Abe will succeed in pulling
Japan out of deflation have been hoping for more steps to boost
the economy on top of aggressive fiscal and monetary policies.
"There have been concerns that Abe may make changes to the
planned tax hike, backpedaling on reforms. But if you believe
today's media report, Abe is heading (in the) right direction,"
said Yunosuke Ikedam, a senior FX strategist at Nomura in
The tax cut report boosted Japan's Nikkei share average
and provided further support for dollar/yen, which has
had a strong correlation with Japanese equities in recent