The dollar extended its rally against the euro yesterday, after a strikingly strong US retail sales report gave support to recent indications of robust economic recovery.

The retail sales data from the US Department of Commerce showed a climb of 1.8 per cent in March, easily topping economists' forecasts for a rise of 0.6 per cent.

Data on US business inventories for February beat expectations too, with growth of 0.7 per cent also signalling growing economic strength in the first quarter of the year.

"It continues to support an outlook of robust growth in the US, and the prospect of a Fed tightening continues to remain quite strong, as early as the third quarter," said Mr Paresh Upadhyaya, portfolio manager with Putnam Investments in Boston.

Much of this scenario has already been priced in, Mr Upadhyaya added.

"I think the dollar has largely reacted in the last week or two to this development of robust growth with earlier prospects of a rate hike. The euro is just precariously perched above its 200-day moving average. That is a pretty significant technical level that a lot of investors are keeping an eye on," he added.

The euro extended its earlier losses yesterday afternoon, sagging to new four-month lows around $1.1905, down about 1.4 per cent on the day.

After a surprisingly strong US employment report at the start of this month, investors have been scrutinising US data for clues the economy is strong enough to warrant higher interest rates, which is lending additional support to the dollar's recent recovery.

Not all commentators were convinced of the significance of the retail sales figure, however, with Mr Niall Dunne of Ulster Bank Markets remarking that "one swallow doesn't make a summer".

Mr Dunne said that, while the data was strong and had indeed caught the markets unaware, it should be overshadowed as the week progresses by a combination of weightier economic data and a raft of corporate results reports.

"We'll have a better idea later in the week, but I still think there's more dollar risk than euro risk," said Mr Dunne, pointing to the problematic US deficit and an over-supply of dollars.

Mr Dunne does not agree with the latest prediction from Davy Stockbrokers which sees the euro falling to $1.10 before the end of the year.