LONDON - The dollar rebounded further from this week's record low versus the euro on Friday as renewed focus on the U.S. economy and interest rates provided some support for a currency badly hurt in the past two months.
The greenback has lost more than eight percent against the euro and yen since mid-October mainly because of concerns about the U.S. current account deficit.
But soaring currencies in Europe and commodity-producing countries are putting a brake on local monetary tightening cycles and the narrowing interest rate differentials are prompting investors to unwind bets against the greenback. Markets are focused on U.S. consumer sentiment data due later in the day and next week's interest rate decisions by the Federal Reserve.
"We are approaching the year-end and the momentum to sell the dollar is easing as the market became overstretched," said Mitul Kotecha, head of global foreign exchange research at Calyon.
"A number of central banks are more and more concerned about the strength in their local currencies, which played a role in monetary policy expectations. This also led people to reassess how far the dollar should fall."
By 3:35 a.m. EST the euro was down half a percent at $1.3247, having hit a record high of $1.3470 earlier in the week. The dollar had risen to a three-week high of 105.47 yen after hitting a five-year low of 101.81 last week.
WHAT DIVERSIFICATION?
The dollar also drew support after China's foreign exchange regulator said the country has not reduced holdings of dollar assets in its foreign currency reserves and will not adjust the makeup of reserves based on short-term market changes.
One factor weighing on the greenback in recent months was speculation central banks around the world are looking to diversify away from it, mainly into the euro.
Japanese finance minister Sadakazu Tanigaki said the issue about reserve diversification required "very careful" discussion.
The slight improvement in the U.S. fundamental picture has also underpinned the dollar. For more clues, the market is looking to November producer prices data and University of Michigan December consumer sentiment later.
The Federal Reserve is widely expected to raise rates by 25 basis points to 2.25 percent when it meets next week, which would take the cost of borrowing there higher than the euro zone where interest rates stand at two percent.
This week, central banks in Canada, Australia, New Zealand, Britain and Sweden left interest rates steady, and markets scaled back expectations the Swiss National Bank would raise interest rates next week.
"Central banks all over the world are starting to show that the weak dollar is affecting them," said Hideaki Furumaya, forex manager at Trust and Custody Services Bank.
Commodity currencies fell sharply this week after the central banks left rates steady and also after oil and other commodity prices eased.
"Oil is lower, gold is lower, commodity currencies are lower. There are fewer and fewer reasons to sell the dollar," said a European brokerage trader in Tokyo.
The market was also cautious about boosting the yen ahead of the Bank of Japan's "tankan" survey of business sentiment, due on Wednesday, given recent economic data that showed Japan's economic recovery is slowing.
Economists in a poll forecast a reading of 23 for the diffusion index of large manufacturers' sentiment, down 3 points from 26 in the last survey, which had been the highest reading since the early 1990s.