LONDON: The dollar hit a three-week high on Wednesday after an upbeat assessment of the US economy by Federal Reserve Chairman Jerome Powell's boosted bets on more interest rate hikes, while the euro edged lower before inflation data.
Against a basket of currencies, the dollar rose 0.2 percent after a 0.6 percent rise on Tuesday that followed Powell's testimony to US lawmakers, which encouraged some investors to believe the Fed would raise rates four times this year rather than three.
At 90.539, the dollar index on Wednesday hit its highest level since Feb. 9.
The dollar has pulled itself from three-year lows hit on Feb. 16 on the back of rising US Treasury yields and investors viewing the currency as oversold. But the jury is still out on whether the dollar is enjoying only a temporary bounce amid a prolonged period of weakness.
"The long-term risks of an expansionary monetary policy in times of a robust economy, which Powell mentioned briefly and that put pressure on the dollar only a few days ago, were now pushed aside by the market," Commerzbank said.
Analysts at the Frankfurt-based bank said that if US economic data due this week was positive, the dollar could push to the area of $1.2180 to $1.2220 versus the euro.
The euro traded down 0.2 percent $1.2207 ahead of core inflation data for February due at 1000 GMT.
After a strong start to the year in which investors speculated the European Central Bank would start withdrawing stimulus as the region's economy recovered well, the euro has stumbled.
As well as inflation data, political developments this week are set to decide the euro's direction. Italians are preparing to vote in a national election on Sunday, while the leading political parties in Germany decide on a coalition deal that would secure Angela Merkel a fourth term as chancellor.
The dollar fell 0.2 percent to 107.18 yen.
The yen edged higher after the Bank of Japan on Wednesday trimmed the amount of super-long Japanese government bonds (JGBs) it offered to buy at its regular debt buying operation.
BoJ officials have said that any changes to bond-buying operations are fine tuning and not meant as hints to future policy.
The yen, a safe haven currency that attracts demand in times of economic uncertainty, also held firm after weak factory data from China undermined investor risk appetite.
Analysts said the dollar could face headwinds against the yen over the next few weeks.
"Once we get past the middle of March and (flows from) exporters and repatriation abate, the dollar will probably gradually show firmness against the yen," said Sumitomo Mitsui Banking Corporation's Okagawa.
Sterling fell 0.2 percent to $1.3881 while the Swiss franc edged slightly lower versus the euro to 1.1497 francs.
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