The dollar strengthened on Wednesday after China's premier said his country needs to put a brake on its surging economy, prompting investors to sell commodity-driven currencies and buy dollars, traders said.
Prices of precious metals plummeted after Chinese premier Wen Jiabao said China needed to slow down its rapidly growing economy, reducing demand for commodities.
"Today we saw a commodity-driven rally in the US dollar after China's premier urged reducing China's soaring demand for commodities, which sent gold to six-month lows and boosted the dollar across the board," said Ashraf Laidi, chief currency analyst at MG Financial Group in New York.
In an interview with Reuters ahead of a visit to Europe, Wen said China needs to act forcefully to cool its red-hot economy, which grew 9.7 percent in the first quarter of 2004, and protect itself against building inflationary pressures.
The dollar rose against the 'commodity bloc' currencies, such as the Australian and Canadian dollars, with the Australian dollar falling 1.8 percent to a session low of US $0.7218 and the US dollar rising more than 1.7 percent to a session high of C$1.3758 against the Canadian dollar, according to Reuters data.
Wen said China must be "very prudent" in reforming its fixed currency regime, saying any rash changes could spell trouble for the Chinese economy and the rest of the world.
The euro fell 0.8 percent against the dollar to a session low of $1.1823 pressured by the sell-off in the commodity currencies and on rising expectations of higher US interest rates in the near future. Sterling dropped 1.1 percent to $1.7711.
Strong US economic data, especially Thursday's first look at first-quarter GDP, which is seen rising 5.0 percent, could justify investors' dollar buying on the expectation that US interest rates, currently at a 46-year low of 1.0 percent, will rise soon, possibly in August.
Thursday's US GDP report comes ahead of next week's key April US employment report. The jobs data could seal the deal, in the market's eyes, of an interest rate rise if the two reports are strong.
The dollar climbed to 110.20 yen before drifting to 110.14 yen, up 0.65 percent on the day.
The market showed little reaction to the Bank of Japan's widely expected decision to keep monetary policy unchanged.
The BoJ said in its semi-annual report that most of its board members expected mild deflation to persist in the coming year and that the central bank would maintain its "quantitative easing" to beat deflation. Japanese markets are closed for Golden Week holidays on Thursday, and also on May 3, 4 and 5.
"The Golden Week usually involves thin liquidity in Japan and leads people to dismiss the daily moves in dollar/yen," Laidi said.
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