The dollar hit an 11-month high against the yen and 1-month high on the euro on Wednesday, extending its gains after a modest brightening of the Federal Reserve's economic forecasts nudged traders to downplay expectations of further monetary easing.
US 2-year Treasury yields hit a 7-1/2-month high after solid retail sales data, making the dollar less attractive as a funding currency for carry trades. Tokyo exporters were also reluctant to sell it now, expecting more strength, traders said. These factors saw the dollar hit a session high at 83.32 yen, its highest level since mid-April, with most traders expecting a short correction soon, before refocusing on last year's high at 85.53 yen. "The move in the yields was essential for the dollar rally to continue," said Sumino Kamei, senior currency analyst at the Bank of Tokyo-Mitsubishi UFJ in Tokyo.
Recent easing steps by the Bank of Japan, the country's trading deficit amid surging demand for fossil fuels in the wake of the nuclear crisis have also helped the dollar rise a staggering 9 percent on the yen since the beginning of February. But investors said that a pullback in the dollar would likely be limited to the mid-82 area with the previous high of 82.65 lending support. Longer term, they were mostly bullish, with Barclays Capital raising its three month target to 88 yen. The US unit gained also against all other currencies, with its index hitting a 7-1/2-week high of 80.42.
In the past, investors tended to sell the dollar to buy higher-yielding assets on any upside surprise in key US data. Now, strong numbers are seen as lengthening the odds of more action from the Fed, which is positive for the dollar. Reflecting this view, the euro fell some 40 pips to $1.3037, triggering stop losses below support at $1.3054, the 50 percent retracement of the January 16-February 24 rally.
Further support looms at the next major trough on daily charts at the February 16 low of $1.2974, and the 61.8 percent retracement of the January to February rally at $1.2954. The Australian dollar also fell against the US unit. It was down 0.3 percent at $1.0505, inching closer to the seven-week trough of $1.0473 plumbed on Monday. In Europe, eurozone industrial production for January and inflation data for February are due later in the day.
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