Dollar gains, eyes on U.S. retail sales

By Patrick Graham

LONDON (Reuters) - The euro looked set to end the week in positive territory on Friday, a half percent loss on the day leaving it well above $1.0700 and stymying those who had expected the greenback to surge again after very strong jobs data a week ago.

European GDP numbers and, later, U.S. retail sales are the main events for a market which has proved stickier for the U.S. currency than many analysts were expecting even as pricing firms around a rise in Federal Reserve interest rates in December.

Fed deputy governor Stanley Fischer pointed late on Thursday to the impact of the dollar’s gains on inflation but gave no sign that the stronger currency would be a barrier to raising rates and said its influence on prices would wane next year.

The dollar was up 0.4 percent on the day at $1.0777 per euro by 0801 GMT , down around half a cent compared to opening levels at the start of the week.

"We may see another wobble around retail sales today, but really the dollar should grind higher against the euro into the end of the year," said Richard Benson, Co-Head of Portfolio Investments at currency fund Millennium Global in London.

"The divergence between monetary policy at the big central banks is very powerful. We're not fully priced yet for a Fed hike in December and when they do lift off we'll have to put a load in for the next two years."

While there is a broad consensus between the major banks around further gains for the dollar, a range of arguments have emerged this week for why the euro may yet prove somewhat more robust than the market's biggest dollar bulls expect.

Morgan Stanley strategist Ian Stannard pointed to the impact on risk of higher Fed rates, a stronger dollar, and resulting lower commodity prices, as one factor that may feed back to support the euro.

"If investors appetite for risk is constrained then the use of the euro as a funding currency would be constrained under that environment," he said.

"Its not going to be a straightforward dollar rise, you could well see a situation whereby the euro dollar decline is not so obvious as many people believe."

The dollar fetched 122.75 yen after capping off three straight days of losses on Thursday, leaving it almost flat for the week.

A big move in the background this week has been a surge in the cost of derivatives providing protection against big moves in sterling over the next two years. Spot rates of the pound have held up well, but 1-year implied volatility on Thursday topped 10 percent to hit its highest in 3-1/2 years.

"There may be some M&A action in there, but a lot of it is founded on worries over the Brexit debate next year," Millennium's Benson said.

Sterling traded 0.1 percent lower on the day at $1.5219 and half a percent higher against the euro at 70.68 percent.

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