By Gertrude Chavez
NEW YORK (Reuters) - The dollar retreated against the euro on Wednesday after U.S. retail sales data showed consumer spending slowing, which analysts said would keep the Federal Reserve on a path of restrained interest rate hikes.
But the dollar recouped some ground in thin markets after the euro failed to break key levels above $1.2400, paring some of the euro zone currency's earlier gains.
Based on Wednesday's U.S. data, "the market believes the Fed will stay the course with a modest rate hike at each meeting for the rest of the year," said Paresh Upadhyaya, portfolio manager with Putnam Investments in Boston.
The euro (EUR=: Quote, Profile, Research) climbed to session highs around $1.2421, according to Reuters data, before trading back down to $1.2396, up 0.5 percent.
The dollar was up about 0.3 percent against the Japanese currency at 108.96 yen (JPY=: Quote, Profile, Research) .
Against the Swiss franc (CHF=: Quote, Profile, Research) , the dollar was at 1.2275 francs, down 0.6 percent. Sterling (GBP=: Quote, Profile, Research) traded virtually flat at $1.8562.
U.S. retail sales slid 1.1 percent in June, far beyond economists' forecasts of a 0.6 percent fall. Excluding a large decline in auto sales, retail purchases fell 0.2 percent.
Some economists remained upbeat about consumer spending, which accounts for about two-thirds of U.S. economic activity.
"It is highly unlikely (it) will falter given robust employment growth and ... extraordinarily expansive fiscal and monetary policy. We do see real consumer spending growth the next several quarters around the 3 percent annual pace," said Wes Beal, chief U.S. economist at IDEAglobal in New York.
A separate report showed U.S. June import prices unexpectedly fell 0.2 percent, the first fall in nine months.
That outlook weighed on the dollar since more moderate U.S. interest rate increases would likely diminish the allure of dollar-denominated assets to foreign investors.
"With two major U.S. economic reports (the other being the U.S. trade deficit data on Tuesday) now behind us for the week, it certainly appears that softness in the economic data is going to be with us for a while," said Michael Woolfolk, senior currency strategist at Bank of New York.
"Unless inflation or manufacturing data surprise to the upside later this week, the dollar looks particularly vulnerable to renewed selling," he added.
Earlier, the yen struggled, plumbing a five-week low against the euro as worries over the outlook for the technology sector weighed on Japan's stock market and its currency.
Japan's benchmark stock index, the Nikkei average , closed down more than 2 percent after U.S. semiconductor giant Intel cut its profit margin forecasts.
Intel's announcement added to signs that a technology sector pick-up has waned, leading to the biggest one-day percentage loss in Japan's stock market since May 17. (Additional reporting by John Parry in New York and Kyle Peterson in Chicago)
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