Dollar: Retail Sales Pave Way for More Optimism from Fed

Stronger U.S. retail sales numbers helped to drive the dollar higher against all of the major currencies. As usual, we expect the dollar to sustain its gains against the Japanese Yen but the dollar's strength against higher yielding currencies should be limited once U.S. equity markets open as a recovery in risk appetite encourages flows out of the dollar and into the euro, British pound and Aussie.

According to the retail sales figures, even the blizzards in the Northeast could not keep U.S. consumers out of the stores. Economists were looking for spending to fall by 0.2 percent due to weak weather and a falloff in demand for autos, but strong spending at retailers, bars and restaurants more than made up for the difference. It is a very healthy trend to see Americans eating out more and upgrading their electronics, particularly since the labor market has improved because it means that this recovery in demand should be sustainable.

Excluding the lack of demand for autos, retail sales rose 0.8 percent, far much stronger than the market's 0.1 percent forecast. The pickup in consumption was not a huge surprise following strong reports from individual retailers, the International Council of Shopping Centers and the Redbook survey. Sales of electronics and appliances rose 3.7 percent, the largest rise in a year while sales at restaurants and bars rose 0.9 percent, the most since April 2008.

The Federal Reserve should respond positively to the latest consumer spending and employment numbers at their monetary policy meeting next week. Given that strong job growth is expected in March, there is a good chance the Fed will grow more optimistic and more hawkish, which should fuel further gains in the U.S. dollar.