Dollar steadies after boost from US retail sales

TOKYO, Dec 14 (Reuters) The dollar steadied on Thursday after scoring gains the previous session on data showing solid U.S. retail sales in November that eased some worries about the Federal Reserve possibly cutting interest rates next year.

The 1.0 percent jump in sales far exceeded expectations and was the strongest in four months, suggesting that U.S. consumers are holding up before the holiday shopping season even as the housing market suffers through a sharp slowdown.

Coming after a report showed healthy job growth in November, investors have trimmed back some of their expectations for the Fed to cut rates to stem any further weakness in the economy.

But many market players are still looking for the Fed to cut rates in 2007 and thereby undermine the dollar's yield advantage, even as other major central banks seem poised to keep ratcheting short-term rates even higher.

Currency strategists at Morgan Stanley pointed out in a note to clients that the dollar was ''unable to make meaningful headway against currencies where economies are strong and central banks are in play''.

U.S. interest rate futures are pricing a roughly 20 percent chance of a rate cut in the first quarter of 2007, down from about 30 percent before the retail sales data.

The euro was steady at $1.3210 holding below the 20-month high of $1.3370 struck earlier this month.

The dollar slipped to 117.45 yen down from near 117.60 yen late in New York trade.

The single currency also lost ground to 115.15 yen from 155.35 yen late in New York and was down from an all-time high of 155.50 struck on Wednesday.

The yen remained under pressure as expectations have dissipated for the Bank of Japan to lift rates to 0.5 percent from the current 0.25 percent at next week's policy meeting.

Without citing any sources, the Nihon Keizai newspaper reported on Thursday that the BOJ is unlikely to raise rates this month to further assess the state of personal spending, inflation and the U.S. economy.

A wide array of investors and speculators have borrowed the yen and used the funds to buy higher-yielding currencies in the carry trade, driving sterling to eight-year highs against the Japanese currency and the Australian dollar to a nine-year peak.

Investors are awaiting the BOJ's quarterly tankan report on business sentiment due on Friday, looking for signs of strength that could help pave the way for a rate increase as soon as January.

Most market players expect a BOJ rate rise in the first quarter next year.

Traders are also keeping an eye out for comments from U.S.

Treasury Secretary Henry Paulson who is due to arrive in China for talks and is coming with a high-profile delegation including Fed Chairman Ben Bernanke.

REUTERS DKS PM0616