LONDON: The dollar rose to its highest in more than three weeks against a basket of currencies, buoyed by firmer US yields, as the Federal Reserve began to sound relatively hawkish on policy and more confident about the US economic recovery.
US rate futures shifted to show better-than-even chances of a rate increase in September 2015; previously, they had pointed to a rise in October.
The Fed has held rates near zero since December 2008 and more than quadrupled its balanced sheet to $4.4 trillion with three separate asset-purchase programmes.
The Fed ended its latest such programme on Wednesday, and in a statement noted the improving US labour market. It dismissed recent financial market volatility, Europe's stagnant economy and largely weak inflation outlook.
While it said rates would remain low for a "considerable time," the Fed's statement helped to push up US yields and increased the dollar's appeal.
"The positive sentiment is likely to be reinforced by today's third-quarter gross domestic product data," said Esther Reichelt, currency strategist at Commerzbank. Forecasts are that the US economy grew at an annualised pace of 3 percent in the third quarter, putting it on track for a robust performance.
"That sounds more like an environment in which rate hikes will one day be possible. At levels around $1.26 for euro and above 109 in dollar/yen, the dollar is finally trading at levels again that we consider to be justified," Reichelt added.
The dollar index, which measures the US currency against a basket of six major rivals, rose to 86.452 on Thursday, its highest since Oct. 6.
The euro touched a 3 1/2-week low of $1.2555 in European trade, and was last trading at $1.2585, still down 0.35 percent on the day.
Against the yen, the dollar rose above 109 yen for the first time in 3 1/2 weeks, to hit a high of 109.31 yen. The dollar last traded at 109.05 yen, up 0.1 percent.
The dollar's gains came as the yield on benchmark 10-year Treasury notes hit 2.33 percent and its spread over its German counterpart rose to its highest since early October.
EYES ON GERMAN CPI
The widening spreads left the euro struggling, with investors wary of German inflation numbers later in the day.
The early regional indications suggested the risk of a downside surprise. A year-on-year increase in German consumer prices of 0.9 percent is forecast, up from 0.8 percent in September.
"On the inflation side, euro weakness and its impact on inflation has been reduced by sharply falling commodity prices," Morgan Stanley said in a note. The euro could come under more pressure if German inflation falls short of expectations, the MS analysts said.
On Friday, euro zone inflation data is due, and forecasts are for an annual 0.4 percent reading, up from 0.3 percent in September.
The European Central Bank has been grappling with low inflation for much of this year and has lowered rates to near zero and talked the euro lower to ward off disinflation.
The New Zealand dollar, meanwhile, fell after that country's central bank sounded a bit more dovish following a widely expected decision to leave rates unchanged.
The kiwi, already under pressure against a firmer US dollar, fell to $0.7770 from around $0.7820 before the announcement.
It last traded at $0.7800, flat on the day.
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