The dollar strengthened to a one- week high on Thursday against the euro as U.S. retail sales advanced in May twice as much as economists forecast, raising speculation the Federal Reserve may increase interest rates from the current 2 percent this year. Although the dollar was cashing in on reduced ECB rate hike expectations, some analysts said markets' Fed expectations were also looking overdone with the possibility of three rate hikes priced in by year-end FEDWATCH.

In U.S. session, the euro was down to 1.5379, on track for its biggest weekly loss in percentage terms since early June 2005. The dollar hit a 3-1/2-month high versus a basket of six major currencies at 74.038 and rose to a session peak of 108.08 against the Japanese yen, near, the highest since late February.

The euro traded weakly versus Japanese yen to 165.65 initially but then rose back to 166.58 in late U.S. session. South Africa's rand weakened against all of the other major currencies as the central bank raised its target lending rate by a half-percentage point to 12 percent, less than the 1 percentage point forecast by most economists. The rand dropped to 8.1500 against the dollar. It has fallen 6 percent since May 30.

The Australian dollar dropped to as low as 0.9327 and 100.54 versus U.S. dollar and Japanese yen respectively after the Bureau of Statistics reported that employers unexpectedly eliminated jobs last month (-19.7K in May versus 37.5K in April).

The U.S. dollar index traded on ICE futures in New York increased as much as 1.1 percent to 74.038, the highest level since Feb. 28, after the retail report.

Retail sales increased 1 percent in May as Americans used their tax rebates to shop, the Commerce Department reported (the median forecast was for a 0.5 percent increase). The gain followed a revised 0.4 percent advance the prior month.

The dollar also rose after InBev NV, the world's biggest brewer by volume, offered $46.3 billion in cash for Budweiser maker Anheuser-Busch Cos.

Speculation that Irish voters may not support a new European Union governing treaty in a referendum today weighed on the euro. A defeat would kill the Lisbon agreement, which requires unanimous approval of all 27 EU nations.

The U.S. currency was supported by speculation that finance ministers from the Group of Eight countries might make comments discouraging the currency's decline at meetings in Osaka, Japan, this weekend.

On Friday, economic data releases including New Zealand retail sale, Japan’s industrial production, capacity utilization and later in Asian session, the BOJ report, Germany CPI and HICP data, eurozone labour cost and employment, U.S. consumer price index, real earnings and University of Michigan survey.