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Aug 14, 2009, 2:45 p.m. EST
Dollar Gains on Euro After Consumer Confidence Falls

By Deborah Levine, MarketWatch

NEW YORK (MarketWatch) -- The dollar turned higher against the euro Friday, gaining as stocks fell out of favor following a report that showed that confidence among U.S. consumers declined unexpectedly last month.

Separately, the government reported that it gauge of consumer prices was unchanged in July, as analysts had expected, easing concerns about inflation. Both reports supported the Federal Reserve's argument that it can keep interest rates low for an extended period of time.

The dollar index , which measures the U.S. unit against a basket of six major currencies, rose to 78.906, up from 78.390 in North American late trade on Thursday. It stood at 78.975 last Friday.

The euro changed hands at $1.4169, down from $1.4304 late Thursday, and the British pound bought $1.6494, down from $1.6587.

The dollar fetched 94.86 Japanese yen, down from 95.32 yen late Thursday.

A week ago, the euro went for $1.4185 and the dollar bought 97.53 yen.

Currency traders keyed on the Reuters/University of Michigan index on consumer sentiment, which declined in early August to 63.2 from 66.0 in July. See more on consumer sentiment.

The report followed data on Thursday that showed U.S. retail sales unexpectedly declined last month, despite the popularity of the government's so-called cash-for-clunkers program.

"Anybody pinning hopes of a sustained V-shaped recovery on the back of pent-up demand from the U.S. consumer is hopefully disavowed of that notion after the retail sales report yesterday and this report," said T.J. Marta, chief market strategist, Marta on the Markets.

U.S. stocks sold off sharply after the data, aiding the dollar. For months, the greenback has tended to move in the opposite direction as equities as investors' willingness to buy riskier assets fluctuates, though it showed signs of stepping away from that trend in the past week. The yen has been the primary beneficiary of safe-haven-related trades.

"Risk aversion is back with the dollar strengthening against the euro and British pound but weakening against the Japanese yen," said Kathy Lien, director of currency research at Global Forex Trading.

As for the tame July data on retail-level inflation, they "provide a strong reason for why the Federal Reserve is in no rush to raise interest rates," Lien said. "Inflationary pressures in the U.S. economy are nonexistent." See more on CPI.

The data may lead to reduced expectations of an interest-rate increase. Higher U.S. rates tend to support the dollar by making the nation's debt yields more attractive for investors compared to other countries' debt.

Overall activity in currencies remained range-bound amid light volume, strategists said.

Traders also digested a Fed report that U.S. industrial output rose in July for the first time since October, led by a resurgent auto sector. The seasonally adjusted output of the nation's factories, mines and utilities increased 0.5% in July after a 0.4% decline in June. See more on industrial output.

The euro paid little heed to data that showed annual consumer prices in the euro zone fell 0.7%, a record low and below a preliminary estimate of a 0.6% decline.

Price falls are expected to diminish in coming months as comparisons with last year's spike in food and energy prices drop away, economists said.

Still, significantly below-potential economic output in many euro-zone member states is likely to keep a lid on prices for some time, said Joerg Radeke, economist at the Center for Economic and Global Research.

But the return to economic growth during the second quarter reported Thursday by France and Germany makes it more likely the European Central Bank will begin tightening monetary policy beginning in the second quarter of next year, Radeke said.

This in turn would be bad news for Ireland and Spain as they continue to dig out from collapsed housing markets, he said.
Aussie dollar

In Asian trading Friday, the Australian dollar took center stage, jumping against the U.S. dollar on tough talk by Reserve Bank of Australia Governor Glenn Stevens before paring gains as investors took profits.
CUR_AUDUSD 0.82, -0.01, -0.63%

Stevens said in a prepared statement that "there will come a time when the exceptional monetary stimulus in place at present will no longer be needed."

The central bank's board will then find it "appropriate ... to do what it has done on past such occasions, namely to start adjusting interest rates back towards normal levels," he continued.

Later, Stevens reportedly said he didn't want to specify what level "normal" monetary policy represented, but it was much higher than the present "emergency" setting of 3.0%.

The Reserve Bank of Australia cut a total of 425 basis points, or 4.25 percentage points, between September 2008 and April 2009, to help the Australian economy weather the global crisis.

Earlier this month, the Reserve Bank of Australia kept its policy cash rate steady as widely expected, and indicated it is moving away from an easing bias as the economy recovers. See full story on RBA meeting.

The Aussie bought 82.85 U.S. cents, compared with 84.25 U.S. cents late Thursday. Earlier Friday, it rose as high as 84.77 U.S. cents.

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