* U.S. July consumer spending rises at fastest pace in seven months
* Yen down on Nikkei report on corporate tax cut
NEW YORK, Aug 13 (Reuters) - 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 Jersey.
“By that standard today’s number should keep the Fed on track to curtail quantitative easing purchases in September,” he added.
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 quarter.
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 London.
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 months.