SHY:$USD & Stephen L. Bernard OF DOW JONES NEWSWIRES

By Stephen L. Bernard
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--The dollar rose to its highest level in nearly two months against the Japanese yen Tuesday as traders remained upbeat about U.S. economic growth despite a disappointing report on retail sales.

The pound was among the best-performing currencies on the day after the latest U.K. inflation reading bolstered expectations for an interest-rate hike in the coming months. The euro traded in a volatile but tight range throughout the day after news that gross domestic product in the 17-nation bloc rose 0.3% quarter-over-quarter, matching the pace seen in the third quarter.

Traders largely brushed aside news that U.S. retail sales rose by 0.3% in January, only half of what economists had expected. Major snowstorms across much of the country last month likely kept shoppers at home. Fundamentals for growth in the U.S. economy remain in place despite the temporary slowdown in retail sales growth, analysts said.

"The market's inclination is to give the economy the benefit of the doubt, and the latest numbers will probably not change views that GDP can still register growth close to 4% in Q1," said Alan Ruskin, head of G-10 foreign exchange strategy at Deutsche Bank in New York.

Signs of growth make the dollar more attractive than Japan's yen because that puts upward pressure on U.S. bond yields, increasing the greenback's appeal, as investors anticipate the Federal Reserve will start to raise interest rates from near zero long before Japan.

The dollar hit a high of Y83.93 Tuesday, its highest level since Dec. 20. The dollar has steadily gained on the yen recently as two-year U.S. Treasury yields have risen.

Late Tuesday, the euro was at $1.3485 from about $1.3488 late Monday, according to EBS via CQG. The dollar was at Y83.78 from Y83.34, while the euro was at Y113.00 from Y112.43.

The U.K. pound was at $1.6124 from $1.6043. The dollar was at CHF0.9671 from CHF0.9702.

The ICE Dollar Index, which tracks the U.S. dollar against a trade-weighted basket of currencies, was at 78.602 from about 78.591.

Though traders are growing more optimistic about the U.S. economy, which helped the dollar against the yen, expectations for interest-rate hikes in Europe remain a primary consideration. Market participants don't expect the U.S. or Japan to raise rates anytime soon, so traders continue to bid up currencies where rate hikes are expected in the coming months.