NEW YORK, May 7 (Reuters) - The dollar gained on Wednesday as comments from a Federal Reserve official increased expectations that the U.S. central bank's cycle of aggressive interest rate cuts may be nearing an end.
Kansas City Fed President Thomas Hoenig late on Tuesday said that rates will need to be raised in a timely way as the central bank grapples with a serious threat of inflation. For details, see [ID:nN06528406]
The euro also fell on reports showing euro area retail sales were much weaker than expected, down in monthly as well as annual terms, while German manufacturing orders unexpectedly fell by 0.6 percent in March -- underlining concerns about the slowing economy. [ID:nL07774862]
"Kansas City Fed President Hoenig ... warned that inflation is 'troublesome' and too high," said Benedikt Germanier, senior currency strategist at UBS in Stamford, Connecticut. "He suggested that when the Fed is ready to raise rates, it may do so relatively quickly."
Hoenig is not a voting member of the Fed's policy-setting arm this year.
The euro traded 1 percent lower on the day at $1.5368
The dollar rose 0.6 percent to 105.33 yen
A run of poor economic data has pressured the euro in recent weeks after it hit a record high above $1.60, peeling away perceptions that the euro zone was insulated from the U.S. downturn.
Adding to the bearish picture, data from France, the euro zone's second biggest economy, showed a record trade deficit for March.
Still, the European Central Bank is expected to hold interest rates steady on Thursday at 4 percent, leaving the focus on the post-decision briefing by ECB president Jean Claude Trichet, who is expected to maintain a hawkish line on inflation.
"The euro-zone retail sales were particularly disappointing, it does suggest that European consumers are slowing down. All the data suggest the outlook is deteriorating for Europe and that's consistent with downward pressure on the euro," said Teis Knuthsen, currency strategist at Danske Markets in Copenhagen.
DOLLAR STRENGTH
Sterling fell to an 11-week low against the dollar to trade down 1.1 percent at 1.9518
Also boosting the dollar were comments from U.S. Treasury Secretary Henry Paulson, who told The Wall Street Journal in an interview that "the worst is likely to be behind us" from the crisis spawned by surging defaults on U.S. home mortgages. [ID:nN06526869].
Some analysts, however, said that investors may be getting too optimistic about the dollar's outlook as a rate rise by the Fed would be unlikely to help the U.S. economy, given that inflation pressures have been prompted by high oil prices, rather than consumer demand.
"Interest rates at their currently low level are going to be necessary for some time, irrespective of inflation pressures to make sure that a recession or even a depression is avoided in the United States over the next 12 to 18 months,"
The inflationary pressures reflected in oil prices continued, with U.S. crude CLc1 sitting at $121.52 a barrel compared with Tuesday's record high at $122.73. (Reporting by Nick Olivari; Additional reporting by Veronica Brown in London; Editing by Leslie Adler)