TOKYO/SYDNEY: The dollar took a breather on Tuesday from its recent rally but was still not far from four-year peak against a basket of major currencies, and could be on track to post its biggest monthly gain in over a year.
The dollar index last stood at 85.544, not far from an overnight peak of 85.798 - a high not seen since July 2010. Its monthly gain of more than 3 percent could put it on track for the largest since February 2013.
Some analysts cautioned that its three-month long rally was at risk of running out of steam for now, particularly against the yen. "It's really hard to pick a bottom, but it does look to us like it's gone a little too far, and has overshot," said Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong.
"It's like trying to catch a falling knife, in terms of the other currencies at the moment, and bear in mind it's month-end, quarter-end, and, for the Japanese, half-year end, too, so flows tend to be a little more noisy than usual around that period," she said.
The dollar scaled a fresh six-year high of 109.75 yen on Monday and last traded at 109.30 yen, down about 0.2 percent but up nearly 5 percent for the month.
Investors continued to warily watch developments in Hong Kong, where tens of thousands of pro-democracy protesters extended a blockade of Hong Kong streets on Tuesday, stockpiling supplies and erecting makeshift barricades ahead of what some fear may be a push by police to clear the roads before China's National Day.
RALLY'S ROOM TO RUN?
Over the past three months, the dollar index has surged more than 7 percent, driven in part by expectations the Federal Reserve will start to hike interest rates well ahead of its European and Japanese counterparts. Data on Monday showing US consumer spending accelerated in August supported the upbeat outlook for the US economy.
US Treasury yields have risen in line with the gradually improving US economy, with the two-year yield nearing 0.6 percent, a high not seen since May 2011.
That in turn has bolstered the appeal of the dollar against its lower-yielding peers.
The euro came within a whisker of its November 2012 trough of $1.2661 on Thursday before edging back to $1.2695, up about 0.1 percent on the day.
Some analysts said the dollar's rally still had room to run, as the key US nonfarm payrolls report on Friday will likely underscore that the US economic recovery has enough momentum for the Fed to hike interest rates sooner rather than later.
Bank of America Merrill Lynch revised its end-2015 dollar forecast to 115 yen from 112 yen, citing the likelihood of the Fed raising US rates sooner than expected, strong outflows as Japanese investors rebalance portfolios and the disappointing pace of Japanese export recovery.
"Divergence in monetary policy between the Fed and BOJ should result - as it has resulted - in more foreign security investments as part of Japan's portfolio rebalancing," Shusuke Yamada, chief Japan FX strategist at BAML in Tokyo, said in a report.
Euro zone inflation data due later on Tuesday will be closely watched by euro bears, but a bigger-than-expected rise in Germany's annual inflation could potentially help keep the euro zone rate stable.
The New Zealand dollar, down around 6.5 percent this month, was one of the worst performing major currencies in September.
Data on Monday confirming the Reserve Bank of New Zealand had intervened to weaken the currency proved the central bank could talk the talk and walk the walk.
The kiwi last stood at $0.7805, recovering about 0.5 percent on the day, having plumbed a near 14-month low of $0.7708 on Monday.
Its Australian peer has similarly fared poorly, suffering a drop of more than 6 percent this month, a vicious turnaround for a currency that had been trading in a remarkably stable 92-95 cent range. The Aussie fell out of favour as market volatility picked up following the end of the summer lull and as carry trades lost their lustre.
China's patchy economic growth and further declines in the price of iron ore, Australia's biggest export earner, then become excuses for selling the Aussie.
Momentum sellers joined the fray as key chart support levels gave way, handing the currency a one-way ticket to its 2014 trough of $0.8660 set in January.
The Aussie fell as far as $0.8682 on Monday but last recovered about 0.5 percent on the day to buy $0.8758.
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