The dollar inched up on Wednesday, extending large gains made in the previous session when the Federal Reserve surprised markets by making clear it was worried about inflation and suggested it would keep lifting U.S. rates.
The currency clocked its biggest one-day rise against the euro and the yen since mid-2004 on Tuesday following the release of minutes from the Fed's latest meeting, upbeat U.S. factory orders data and dollar buying to cover short positions.
Many traders had expected the year to begin on a dollar-selling note but were caught off guard by the currency's initial gains and scrambled to cover positions, helping to drive most of the dollar's rally this week.
Despite market expectations that the dollar's overall downtrend would not end soon, traders continued snapping the currency up ahead of Friday's U.S. non-farm payrolls data.
"We thought the market would start the year selling the dollar, but it doesn't seem that way," said Shogo Nagaya, forex manager at Nomura Trust and Banking Co. But he said dollar selling "could kick in at any time."
The dollar has gained about 2 percent against the euro and the yen since the start of 2005.
At 11 p.m. EST Tuesday, the dollar was at around $1.3270 per euro, firming slightly from late New York levels.
Few in the market expected the dollar to rise past $1.32 ahead of the U.S. employment data, with euro buy orders seen dotted around that region through $1.3250.
The U.S. currency was little changed at 104.50 yen, still about two yen above the level in late Tokyo trade on Tuesday.
Tokyo dealers expected the dollar to hover above 104 yen during the local session. Although little exporter selling was seen at current levels, orders were lined up around 105 yen.
The euro fetched 138.60 yen, compared with 138.85.
KOREA'S HAND IN RISE
Analysts said that some of the dollar short-covering seen on Tuesday had been prodded by the Bank of Korea's apparent plans to continue intervening in the foreign exchange market.
A senior Korean finance ministry official told on Tuesday that if necessary, the central bank would raise the ceiling on government debt issuances to fund dollar-buying operations to stem the won's rise.
"It shows that Asian central banks are not halting their reserve building uniformly," said Naomi Fink, senior currency strategist at BNP Paribas.
One of the drivers of the build-up in short dollar positions at the end of 2004 was expectations that Asian nations would aggressively diversify their foreign currency reserves. This included talk in late November of China whittling its U.S. Treasury holdings -- eventually denied.
Data released on Tuesday showed the value of new U.S. factory orders climbed 1.2 percent in November, the fastest pace in four months and surpassing market expectations for a 0.8 percent rise.
Many analysts said that broad market repositioning would continue ahead of the payrolls data, which are expected to show that 175,000 new U.S. jobs were created in December.
The figures are seen setting a near-term direction for the dollar if a strong gain reinforces the Fed's intention to keep lifting official interest rates.
Some analysts said that the Fed's renewed commitment to raise rates could provide some salvation for the dollar, which has been battered by concerns about the U.S. current account and trade deficits.
"If the market's focus makes a transition to themes like interest rate spreads, the dollar could make some sustainable gains," said Nagaya at Nomura.
The dollar stands to gain from rising U.S. interest rates as they could lure more foreign investors hoping to earn higher returns on short-dated dollar deposits.