* Euro climbs to one-month high vs dollar
* U.S. retail sales beat expectations (Recasts, updates prices, adds comment)
NEW YORK, March 12 (Reuters) - The U.S. dollar fell to a one-month low against the euro on Friday as risk tolerance rose on strong euro zone economic data, but the U.S. currency gained against the yen on U.S. retail sales data.
The biggest monthly increase on record in euro zone industrial output in January and an upward revision of figures for December prompted the initial rise in risk tolerance. [ID:nLDE62B0SD]. The rise in the euro against the dollar fed on itself as traders covered near-record euro short positions, or bets that the euro had room to fall, to prevent losses.
U.S. February retail sales data then boosted hopes that the world's biggest economy is on a path to recovery. More details click, [ID:nN11242539].
Talk of a policy dove being named as vice chair at the U.S. central bank also weighed on the dollar against the euro.
A source familiar with the process told Reuters on Thursday San Francisco Federal Reserve Bank President Janet Yellen was reported to be the top candidate to replace Donald Kohn as vice chairman of the U.S. central bank [ID:nN11257901].
"Eurozone industrial production and U.S. retail sales were both better than expected and are contributing to the risk-on theme today," said Andrew Busch, global currency strategist at Bank of Montreal Capital Markets in Chicago in a client note.
The euro's gains accelerated after a break above $1.37, triggering stop-loss sales and pushing the pair just short of $1.38, its highest since Feb. 11 on Reuters data.
In morning New York trade, the euro was up 0.6 percent at
$1.3756
Analysts said Yellen's possible appointment was unlikely to prompt the Fed to change course on gradual normalization of monetary policy later this year. They also noted that Kohn was also considered a dove and the composition of the Federal Reserve was unlikely to change dramatically.
But to secure the post, Yellen may have to become more middle of the road, forging consensus by setting aside some of her most growth and employment-friendly inclinations, analysts said.
YEN FALLS
The dollar gained 0.2 percent to 90.69 yen
Sales at U.S. retailers rose unexpectedly in February despite a drop in vehicle purchases and inclement weather that was expected to curtail shopping, according to a government report on Friday that bolstered hopes of a sustainable economic recovery.
"Everything is really turning in favor of dollar-yen," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto. "As for the data on retail sales, I think it keeps hinting that the U.S. recovery is intact and ongoing."
Earlier, the yen dipped on growing speculation the Bank of Japan would take further monetary easing measures next week.
Japan's prime minister and finance minister piled pressure on the central bank on Friday, saying the government and the BOJ should work together to beat deflation. [ID:nTOE62B065]
Japan's leading business daily Nihon Keizai Shimbun said the BOJ would decide to double its 10 trillion yen in funds offered under the lending operation at its March 16-17 meeting. [ID:nSGE62A0J4]
In answer to lawmaker concerns over the yen, Japanese Finance Minister Naoto Kan said markets should set currency rates but authorities could intervene if foreign exchange movements were excessive.
Traders said the yen's falls may be slowed by repatriation flows ahead of Japan's financial year-end on March 31.
Such flows by Japanese firms may hit a record this year, helped by a tax break to encourage firms to repatriate profits. (Additional reporting by Steven C Johnson in New York and Tamawa Desai in London ) (Reporting by Nick Olivari; Editing by Dan Grebler)