LONDON—The euro sagged in European hours Tuesday as currency traders jumped on the dollar, pushing the greenback to an eleven-month high against the Japanese yen ahead of an update from the Federal Reserve on the U.S. economy.
The euro was recently trading at $1.3114 from $1.3155 late Monday in New York. The dollar was trading at ¥82.71, compared with ¥82.23. The pound was at $1.5664 from $1.5642.
The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 80.037 from 79.84.
The dollar rose to as high as ¥82.79 as investors bet on solid U.S. retail sales data and as hopes grew that the country's central bank won't have to unleash a third round of quantitative easing, so-called QE3, after a recent run of encouraging employment figures.
"Given recent upside U.S. data surprises and market reaction to [Fed Chairman Ben] Bernanke's house testimony, we think expectations of QE3 are already significantly lowered," said RBC Capital Markets in a note to clients.
The dollar's gains, aided by a rise in two-year U.S. Treasury note yields, were made despite a lack of further monetary policy easing action in Japan. The Bank of Japan overnight left its inflation aim and asset purchase program unchanged, while extending a loan facility for key business sectors by Y2 trillion.
The Japanese currency initially strengthened on the news but investor demand for dollars was stronger than the urge to buy the yen as the Asian session gave way to European trading.
Analysts said U.S. retail sales data for February at 8.30 a.m. ET will offer more clues about the state of the world's biggest economy than the Fed's statement due later in the day. The consensus is for a 1.1% improvement.
"For the Fed a strong retail sales number would reinforce the wait-and-see view that has begun to emerge among investors," as well as further support the dollar's advance against the yen, Citigroup said.
Europe's offering of economic data was encouraging but largely failed to move currencies. Germany's ZEW economic sentiment indicator rose sharply to 22.3, compared with a consensus forecast of just 10.
"March's rise in ZEW investor sentiment will add to hopes that the German economy is holding up surprisingly well as other parts of the euro zone slide back into recession," said research house Capital Economics.
Trade data from the U.K. also offered some grounds for optimism by showing the country's deficit widened less than expected in January due to record exports to outside the European Union.
In the wake of the report, sterling tried to consolidate its early gains but was unable to make a big leap higher.
Emerging market currencies traded without direction, in line with the drifting euro, although the forint was slightly weaker after data showed inflation accelerating in Hungary.
