Dollar revived by U.S. data tonic, North Korea respite

By Wayne Cole

SYDNEY (Reuters) - The dollar hoarded hefty gains on Wednesday after strong U.S. retail sales revived the chance of another Federal Reserve rate hike this year, while Asia stocks inched ahead as tensions in the Korean peninsula went off the boil.

European bourses looked set for a somnolent start with Eurostoxx 50 futures (STXEc1) steady, while E-Mini futures for the S&P 500 (ESc1) were also barely changed.

North Korean leader Kim Jong Un has delayed a decision on firing missiles towards Guam while he waits to see what the United States does, as Washington said any dialogue was up to Kim.

The break in threat and counter-threat was enough for South Korean stocks (KS11) to bounce 0.5 percent, though they remain well short of a record peak touched last month.

The next flash point could be a joint U.S.-South Korean military exercise starting on Aug. 21.

MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) edged up 0.3 percent and Japan's Nikkei (N225) lost 0.1 percent.

There was no clear lead from Wall Street, where the Dow (DJI) ended on Tuesday up 0.02 percent. The S&P 500 (SPX) lost 0.05 percent and the Nasdaq (IXIC) 0.11 percent. (N)

The economic news, however, was much more emphatic, with U.S. retail sales rising the most in seven months in July as consumers spent more on 10 of 13 retail sectors.

Importantly, upward revisions to sales for both May and June countered concerns that consumption had entered a downtrend and lifted the outlook for economic growth.

Investors reacted by narrowing odds on the Fed tightening again this year and sent two-year Treasury yields (US2YT=RR) up to 1.36 percent, from 1.29 percent on Friday.

Minutes of the Fed's July meeting are due later in the session and should show how the debate on rate hikes is shifting within the central bank.

"The minutes will show a Committee that is likely to announce a change in balance sheet policy at the September meeting," wrote analysts at JPMorgan (NYSE:JPM) in a note.

"We think the minutes will be less forthright about the timing of the next rate hike, which we still expect to occur in December."

BITCOIN BONANZA

The dollar duly rallied to its highest level against a basket of major currencies in nearly three weeks and was last holding at 93.824 (DXY).

The euro dipped to $1.1740, though it had found solid support around $l.1686 overnight.

The yen took an added blow from the easing in risk aversion and sagged to 110.64 per dollar . The dollar's 1.4 percent jump on Tuesday was the biggest daily rise since April.

Sterling also slumped after UK inflation numbers came in below forecast, breaching key support levels against both the euro and dollar. The pound was last at $1.2863 , having shed 1.1 percent the previous session.

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All that action paled in comparison to the digital currency Bitcoin, which has surged over $1,200 so far this month to reach $4,100 amid fevered speculative demand.

"Interest in digital currencies has spiked recently as proponents tout benefits such as a lack of centralised control and limited supply," said William O'Loughlin, an investment analyst at Rivkin Securities.

"However, anyone thinking of buying the currency should realise that it is incredibly volatile and could fall in value as quickly as it rose."

In commodity markets, the revival in risk appetite dragged gold back to $1,272.90 an ounce , and away from Friday's two-month top of $1,291.86.

Oil prices nudged higher after data from the American Petroleum Institute showed a much larger fall in crude inventories than expected. [O/R]