Dollar stays near 3-week high after retail sales boost

The dollar held near three-week highs against a basket of major currencies on Friday after a raft of strong US economic data rekindled expectations of an earlier policy tightening by the US Federal Reserve.

US retail sales unexpectedly increased in August, rising 0.7 per cent from the previous month despite expectations of a 0.8 per cent fall, while a business sentiment survey by the Philadelphia Fed also showed a big improvement.

"Yesterday's data were pretty strong across the board," said Yujiro Goto, chief currency strategist at Nomura Securities. "The markets had been worried that consumption would be weak in August because of the Delta variant. But retail sales were surprisingly strong."

The figures helped to curb cautious views on the US economy after a tame consumer inflation reading and soft job growth data earlier this month, and revived expectations for an early Fed tapering.

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The more bullish mood faces another test later on Friday with the release of University of Michigan's consumer sentiment index, which surprised many investors last month by tumbling to a decade-low due to smaller income gains and higher inflation.

The dollar index stood at 92.865, near Thursday's three-week high of 92.965. The euro hit a three-week low of $1.17505 overnight and last traded at $1.1769. The common currency also hit a three-week low of 128.61 yen and one-month low of 0.8501 British pound, before recovering some losses.

The dollar's strength was most pronounced against other safe-haven assets, such as the Swiss franc and precious metals. The Swiss franc hit a five-month low of 0.92805 to the dollar, after falling 0.89 per cent on Thursday. Gold edged up a tad to $1,759.3 per ounce after a 2.3 per cent fall in the previous session, while silver changed hands at $22.92 per ounce.

Silver lost 3.7 per cent on Thursday, take it towards eight-month lows touched in August. The dollar bounced back to 109.84 yen, having gained 0.34 per cent on Thursday to rise off Wednesday's six-week low of 109.11.

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The yen has so far shown only a limited reaction to the ruling Liberal Democratic Party's (LDP) leadership race, which will formally kick off on Friday ahead of a Sept. 29 vote. The LDP's parliamentary dominance means the party's new leader will become prime minister. Many investors see vaccine minister Taro Kono as a front-runner, followed by former foreign minister Fumio Kishida and former internal affairs minister Sanae Takaichi.

"The world's major macro players are not expecting big policy shifts. A lack of moves in the yen is a testament to that," said Hiromichi Shirakawa, vice chairman and chief economist for Credit Suisse in Japan.

Still, former internal affairs minister Seiko Noda's decision to join the race on Thursday increased uncertainties as it means no single candidate may win on the first round, taking the election to a run-off that could work against Kono.

Elsewhere, sterling eased to $1.3795 while the Australian dollar traded at $0.7294 after touching a three-week low of $0.7274 in the previous session.

The Chinese yuan licked its wounds after Thursday's 0.4 per cent fall. The offshore yuan last traded at 6.4545 to the dollar, pressured by growing worries about China's real estate sector as investors fear property giant China Evergrande could default on its coupon payment next week.

Still, on a trade-weighted basis, the yuan stood near its highest level in five years, both in the onshore and offshore market.

"It is hard to tell how big the impact will be. So far only Chinese shares appeared to be affected but whether this will lead to a risk-off trade, we will have to see," said Hiroshi Morimatsu, director of forex at MUFG Bank.

Cryptocurrencies stepped back from this week's high with bitcoin traded at $47,774 and ether at $3,558.

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