The dollar rose for a fifth session to hit a four-week high against the euro and jumped one percent against the yen on Thursday on expectations for rising U.S. interest rates and better economic data.
The dollar's new year rally from record lows on the euro has been fueled by the minutes from the Federal Reserve's latest meeting on Tuesday, that signaled the U.S. central bank could step up the pace of interest rate rises, and ahead of the U.S. jobs report for December.
"Things are starting to move in the dollar's favor. The cyclical arguments for buying the dollar are quite strong in terms of what's happening with interest rate differentials and the likely outperformance of growth," said Steven Pearson, chief currency strategist at Halifax Bank of Scotland.
The greenback is expected to gain from rising rates as more international investors are lured by better returns on deposits but this could be overshadowed by persistent worries about structural weaknesses in the U.S. economy.
By 1230 GMT, the dollar stood at $1.3185 per euro, up around half a percent on the day and at its highest levels in four weeks.
The dollar stood at 104.87 yen, up almost one percent from late New York levels after hitting a three-week high at 105.19.
The greenback was also at six-week highs against sterling after the pound was rattled by weak UK services data.
Japan's top financial diplomat Hiroshi Watanabe said recent movements in the currency markets were "rather wild" and authorities were ready to take action as needed. The dollar has risen over two yen since the start of the year.
U.S. weekly jobless claims are due at 1330 GMT, forecast at 331,000 from the previous 326,000.
JOBS DATA KEY
The market is waiting for the non-farm payroll figures due on Friday to see if the dollar will extend its nascent rally or resume a three-year downtrend driven by concerns about the U.S. current account and budget deficits.
The dollar has risen more than three cents against the euro in 2005 after hitting record lows beyond $1.36 in the final trading days of 2004.
A hefty rise in U.S. jobs would likely encourage the Federal Reserve to keep lifting official U.S. interest rates and give the dollar another boost, at least temporarily, analysts said.
"Cyclical developments and yields can only help in the short term," said Marios Maratheftis, currency strategist at Standard Chartered Bank. "I don't think this recovery is sustainable," he added.
Economists polled by said 175,000 jobs were likely created in December, up from November's 112,000 gain.
By contrast, European data has been largely disappointing.
On Thursday, French consumer confidence fell unexpectedly in December to its lowest level in a year, euro zone economic sentiment fell for the second month running in December and euro zone producer prices for November also fell.
Also, German retail sales fell 2.5 percent on the month in real terms in November, weaker than economists expected, data earlier on Thursday showed.
The Fed's unexpected statement this week that interest rates were too low to contain inflation pointed to more rate increases in future, helping fuel the dollar's rebound.
But many traders and analysts expect persistent worries about the United States' ability to lure more than the $2.5 billion of capital a day needed to fund its still swelling deficits.