LONDON: The dollar rose against the yen and the euro on Wednesday as expectations grew that key economic data from the United States this week could increase pressure on the Federal Reserve to exit its bond-buying programme.
The euro fell 0.1 against the dollar to $1.3580. It also pared gains against the yen after mixed euro zone service sector data, with activity in Italy and France contracting in November but expanding in Spain and Germany, highlighting the divergence in the bloc.
The Australian dollar fell to a three-month low as investors pared back riskier bets and after Australia's GDP growth came in below market expectations.
The U.S. dollar reversed early losses to trade up 0.3 percent against the yen at 102.80 yen. The dollar index rose 0.2 percent to 80.742.
Markets are eyeing U.S. GDP data on Thursday and the non-farm payrolls report on Friday, which investors will study for clues about when the Fed will taper its monetary stimulus. Its next policy meeting is on Dec. 17-18.
Many investors and analysts expect the Fed to begin reducing stimulus at its March meeting, so an upbeat employment report would increase speculation that tapering could come earlier.
"This week is maybe the most important week for the dollar now for the year," said Manuel Oliveri, currency strategist at Credit Agricole. "There's a lot of risk for the dollar to appreciate on the back of surprise data from the U.S."
Oliveri expect the Fed to begin tapering in January.
Hedge funds sold the Australian dollar after data showed 0.6 percent growth in GDP in the third quarter, below analysts' median forecast of 0.8 percent.
That news came just a day after the Reserve Bank of Australia kept its cash rate steady at a record low of 2.5 percent, although it reiterated that the local currency remained "uncomfortably high", and expectations have now grown that it could act at its next meeting.
The Aussie dropped 1.1 percent to $0.9036, breaking through the key support level of $0.9050/55. A sustained break could see a retracement all the way to this year's low of $0.8848.
Hedge funds have been negative on the Aussie for some time. CQS founder Michael Hintze, whose firms runs around $12 billion, told Reuters last month that he was short the Australian dollar, citing the "very, very clear" wish of central bank governor Glenn Stevens for it to weaken.
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