Forex - U.S. dollar firms slightly; Pound extends gains on strong retail sales

LONDON (Thomson Financial) - The dollar firmed slightly as a weak manufacturing survey was accompanied by further evidence of rising prices, while the pound continued to gain after shockingly strong UK retail sales data increased talk of a UK interest rate hike.

The latest Philly Fed survey of manufacturing in the mid-Atlantic region showed a further contraction in June, surprising economists who thought the situation would improve slightly from May. Worries about rising inflationary pressures remain, however, as the prices paid component jumped sharply, keeping alive the possibility that the Federal Reserve may begin to consider increasing U.S. interest rates.

The U.S. dollar also firmed against the euro as the single currency suffered sharp falls against the pound, falling to a three-week low.

The UK currency has been strengthening sharply across the board after Thursday's retail sales data, which showed a massive 3.5 percent month-on-month rise during May that confounded all expectations. The rise was the highest since records began in 1986.

"There is more talk of a rate hike in the UK now, especially after today's shocking retail sales data, coupled with the doom and gloom coming out of Mansion House last night," said Mic Mills, a trader at TradIndex.com.

Bank of England governor Mervyn King adopted a more hawkish stance at his annual Mansion House speech on Wednesday, stressing that the central bank will "take whatever action is needed to return inflation to the 2 percent target and to keep expectations of inflation in the medium term anchored to the target". He also warned that households may have to get used to the pain of high inflation over the coming year.

The comments caused the market to reassess the dovish interpretation of King's letter to Chancellor Alistair Darling on Tuesday after annual CPI inflation rose to 3.3 percent, where he said a rate hike now could harm the economy.

London 1630 GMT London 1600 GMT U.S. dollar yen 107.99 up from 107.66 Swiss franc 1.0462 up from 1.0438 Euro U.S. dollar 1.5488 down from 1.5491 pound 0.7852 down from 0.7868 yen 167.32 up from 166.82 Swiss franc 1.6212 up from 1.6171 Pound U.S. dollar 1.9731 up from 1.9686 yen 213.05 up from 211.99 Swiss franc 2.0642 up from 2.0550 Australian dollar U.S. dollar 0.9494 up from 0.9472 pound 0.4811 unchanged yen 102.55 up from 102.01 jessica.mortimer@thomsonreuters.com jkm/am COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved.

The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.

Taken From : www.cnbc.com