NEW YORK, July 14 (Reuters) - The euro and dollar slipped against the yen on Wednesday as data showing U.S. retail sales fell for a second straight month raised concerns that the U.S. recovery was starting to sputter.
Sterling soared to a 10-week high as data showing a fall in UK unemployment added to speculation that the Bank of England may need to start thinking about raising interest rates.
The June retail sales report followed Tuesday data showing the U.S. trade deficit widened unexpectedly in May, prompting some to cut second-quarter growth forecasts. [ID:nN1350097]
The data "confirms a very reluctant American consumer, which is going to put a stall on any recovery in the United States," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey.
Analysts said some investors were bracing for the Federal Reserve to trim its growth forecast when minutes from its most recent policy meeting are released this afternoon.
The euro was trading at $1.2708 EUR=, down 0.1 percent on the day but still close to a two-month high around $1.2740 hit on Tuesday. The dollar fell 0.3 percent to 88.35 yen JPY= while the euro was off 0.5 percent to 112.38 yen EURJPY=.
Sterling rose 0.5 percent to $1.5245 GBP=D4 after earlier hitting its highest level since May on data showing better-than-expected employment data. [ID:nLDE66D0OM]
"People are focused on the softness of U.S. economic data," said Marc Chandler, senior currency strategist at Brown Brothers Harriman in New York, "and the euro's pullback against the dollar has been shallow."
With the U.S. 10-year Treasury yielding barely more than 3 percent, traders also cited a growing demand for higher-yielding assets and growth-related currencies.
"If growth is slowing, yields are likely to fall, so people want to lock in higher yields now," Chandler said. "That's feeding a healthy appetite for risk."
The trend appears to hold for private and public investors. The latest Treasury data shows central banks increased purchases of U.S. agency and corporate debt, both of which offer higher yields than Treasuries. [ID:nN15215858]
EARNINGS OFFER HOPE, EURO STILL SEEN HIGHER
While U.S. data has been on the soft side, though, U.S. corporate earnings have been surprisingly strong so far, and that's also helped risk appetite and hence the euro.
So have smooth auctions of German and Portuguese bonds on Wednesday and Tuesday's successful sale of Greek government paper. [ID:nATH005574].
Worries about heavily indebted euro zone countries such as Greece, Portugal and Spain have driven the euro down some 12 percent against the dollar this year, and while the concerns have not evaporated, markets are feeling less on edge of late.
"Investors are breathing a sigh of relief for now as the Q2 earnings season has begun well and euro zone peripheral problems appear more stable," said UBS currency strategist Geoffrey Yu.
The next target for euro/dollar was the $1.30 area, said Roberto Mialich, currency strategist at Unicredit in Milan.
Others said the next target was at $1.2780, the 50 percent retracement of the euro's fall from mid-April to the June low.
"The euro has lost momentum, and its upside requires another push higher in equities" said Adam Cole, global head of currencies at RBC. "It has benefited the most from risk demand, so further gains will require more positive U.S. earnings surprises."
