Market LookBeck II

(Reuters) - The dollar climbed against the yen and euro for a third straight session on Monday as U.S. retail sales data eased fears about an economic slowdown in the world's largest economy.

The dollar, which pierced the 100-yen mark last week, continued to add to gains, hitting its highest level against the yen since October 2008 after Group of Seven finance officials over the weekend held back from directly criticizing Japan's monetary policy.

The U.S. currency's outperformance can largely be attributed to diverging central bank policies, with aggressive monetary easing in Japan and concerns about the risk of negative deposit rates in the euro zone contrasting with expectations the U.S. Federal Reserve will scale back its asset-buying program later this year.

The greenback received an added boost from data showing U.S. retail sales unexpectedly rose in April as households bought automobiles, building materials and a range of other goods, pointing to underlying strength in the economy.

The increase in core sales came on the heels of relatively strong job growth over the last three months. The state of the labor market is a key component of Fed policy.

"Commentary from the G7 meeting was roundly supportive of Japan's policies, with the Japanese envoy declaring victory upon leaving London, gleefully noting that no G7 member was opposed to the country's aggressive and fiscal easing policies," said Christopher Vecchio, currency analyst at DailyFX in New York. "If the yen continues to weaken at its current pace, the G7 is likely to change its tune - but for now, there's little exogenous pushback."

The dollar last traded at 101.84 yen, up 0.2 percent on the day. It reached a session peak of 102.14 on Reuters trading platform, its highest since October 2008, as investors saw the outcome of the G7 meeting as a signal to sell the Japanese currency.

A bevy of Federal Reserve speakers will provide opportunities for updates on the Fed's exit and the paring back of its asset purchase plan.

An article in the Wall Street Journal over the weekend suggested the Fed was working on a plan to taper its bond buying, currently at $85 billion a month, but gave no indication on the timing.

"There are a lot of Fed speakers this week, but it is clear from their last policy meeting that they are debating both sides, either decreasing or increasing stimulus," said Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman in New York.

Fed Chairman Ben Bernanke will deliver testimony on May 22 on the outlook for the U.S. economy before the Joint Economic Committee of Congress.

Second-quarter U.S. growth could also get a boost from inventories, after businesses kept lean stocks in the first three months of the year. Another report on Monday showed business inventories were flat in March for a second straight month.

Traders said investors took profits on dollar gains above 102 yen, and the currency may struggle in the short term before a reported options barrier at 102.50 yen. But most expect more yen falls, with many seeing a drop toward 105 per dollar.

Some US$2.6 billion in yen changed hands on Reuters Dealing on Monday, compared with US$1.98 billion on the first Monday in April.

EURO FALLS

The euro was last down 0.1 percent at $1.2974, pressured after European Central Bank policymaker Ignazio Visco said the central bank may opt for negative deposit rates.

If the ECB did push its deposit rate into negative territory, banks would effectively be charged for parking spare cash they do not lend.

In a Reuters poll conducted after Visco's comments, 22 of 25 euro money market traders said they did not expect the ECB to cut the rate below zero - in line with findings of a wider poll of economists taken last week.

Meanwhile, Italy's three-year debt costs fell to their lowest since January at an auction on Monday as the backstop from the European Central Bank fed demand for bonds of the euro zone's heavily indebted members.

Against the yen, the euro rose 0.1 percent to 132.15 yen, after earlier touching a three-year high of 132.39, according to Reuters data.