The dollar posted gains on Tuesday after a record increase in U.S. retail sales in May following two straight months of declines, reinforcing a growing belief that the worst may be over for the world's largest economy.
The retail sales data followed a report early this month showing that the U.S. economy created an unexpected 2.5 million jobs in May.
Federal Reserve Chair Jerome Powell, however, doused some of the rosy expectations on Tuesday, as he painted a rather bleak picture of the U.S. economy in the wake of the coronavirus pandemic. That did not stop the dollar from rallying, as his comments bolstered the currency's safe-haven appeal.
In the first of two days of hearings with U.S. lawmakers, Powell said there is significant uncertainty about the timing and strength of the U.S. recovery.
"Powell is sounding quite negative here. I think he's being realistic," said Juan Perez, currency trader at Tempus Inc in Washington.
"The U.S. dollar is gaining a little bit here just because of this uncertainty that Powell mentioned. It seems like monetary officials are preparing for a much longer recession for the U.S. economy."
His testimony came a day after the Fed said it would start buying corporate debt on Tuesday as part of an already announced stimulus scheme, and launched its Main Street Lending Program for businesses.
In afternoon trading, the dollar index was up 0.5% at 97.019 <=USD>, with the euro dropping 0.5% to $1.1262 <EUR=EBS>.
The greenback, meanwhile, was little changed against the yen at 107.29 yen <EUR=EBS>, paring early gains.
Tuesday's data showed U.S. retail sales jumping 17.7% last month, the biggest rise since the government started tracking the series in 1992.
Data for April was revised to show a record 14.7% drop in sales instead of the previously reported 16.4%. Economists polled by Reuters had forecast retail sales would rise 8% in May.
"The lockdowns ended and the 33% starting point for the personal savings rate did provide some decent dry powder for new spending," said David Rosenberg, chief economist and strategist at Rosenberg Research in a research note.
He added that with the recent spate of solid U.S. data, the U.S. economy's real gross domestic product would see a contraction that is "something less negative."
"I think the key will be sustainability and whether there will be follow-through into Q4. So, it all depends on what happens to the economy once the training wheels and hand-holding from the stimulus pull an exit-stage-left," Rosenberg said.
Earlier in the session, investor sentiment improved after news reports said the Trump administration is preparing up to $1 trillion in infrastructure spending focused on transportation projects as part of its push to spur the U.S. economy back to life.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Chris Reese and Paul Simao)
