Good U.S. data continues to flood in, providing fuel for an extended rally in the dollar against all major currencies. Last night’s disappointing Chinese economic reports already bolstered demand for dollars and this morning’s 0.1% increase in U.S. retail sales should send the greenback to fresh highs against the EUR, JPY, AUD and other major currencies. While the overall increase in spending was small, excluding autos and gas, retail sales rose 0.6%, which was the strongest pace of growth this year. The improvement in the labor market and the rise in U.S. equities gave Americans the confidence to spend more on clothing, online purchases, food, drink, electronics and building materials.

If anyone felt that consumer spending was the missing component of the recovery, they have less to worry about today as spending turned positive in the first month of the second quarter after contracting 2 out of 3 months in Q1. The fact that retail sales did not decline 2 months in a row is a big relief for the Federal Reserve whose plans for reducing stimulus stands apart from easier monetary policies in other parts of the world.

Today’s report should help the dollar sustain its gains especially after a weekend Wall Street Journal article by noted Fed watcher Jon Hilsenrath that says the central bank has “mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program.” The Fed’s discussions about tapering asset purchases as soon “as their confidence about the job market and inflation evolves” should keep the U.S. dollar bid as its stands in stark contrast to the policies of other central banks. Over the weekend, ECB President Draghi reaffirmed their dovish stance by saying that they are considering buying Asset Backed Securities as an additional way to support lending and stimulate the economy. With the ECB moving towards more stimulus and the Fed less, it should only be a matter of time before 1.2950 in EUR/USD is broken.

As for USD/JPY, G7 Finance Ministers green lighted the sell-off in the Japanese Yen by avoiding criticism of Yen weakness or Abenomics at this weekend’s meeting. Combined with another positive U.S. economic report, new highs in the Nikkei and Japanese demand for foreign bonds, USD/JPY rally isn’t over. We expect the pair to make its way towards 103.

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