The dollar rallied to fresh highs for the year against major European currencies on Friday after its resilience in the face of weak economic data triggered a technical breakout. The US economic and inflation data has failed to hurt the dollar, reflecting the market's growing bullish sentiment toward the currency. A belief that US interest rates will remain on their upward course, widening the gap with lower European rates, helped the dollar, while political and economic concerns in Europe weighed on the euro. "I think this is a universal recognition that drivers of currencies can be short-term interest rates," said Jes Black, partner and manager at Black Flag Capital Partners, a Hoboken, New Jersey-based hedge fund.
Rising interest rates often benefit a currency, since they attract investors seeking higher returns. Late in the session, after falling through options-related and technical support at $1.2580, the euro hovered near a seven-month low at $1.2562. Sterling also remained near a seven-month low at $1.8276.
The dollar rose to a seven-month high against the Swiss franc at 1.2360, and was trading around 1.2330 francs late in the session.
The greenback was also up against the yen at 108.13 yen, a little lower than the one-month high of 108.29 yen reached earlier in the US session.
One more sign of strength for the dollar is its monthly performance versus the majors.
The euro is on track for its worst monthly performance against the dollar since January, according to Reuters data. Against the yen, the dollar having its best month since April 2004.
The dollar did slip slightly during the day after Federal Reserve Chairman Alan Greenspan, speaking at the Economic Club of New York, said a revaluation of the Chinese yuan is unlikely to lower the US trade gap since US consumer demand will shift to products made by China's competitors rather than domestic US products.
But it was not enough to offset the build-up of momentum which has forced a technical rally and a wave of stop-loss buying.
"We were stuck in a pretty tight range for some time and today we decided we're going to break it," said Grant Wilson, senior dealer at Mellon Bank in Pittsburgh. "You're seeing people on the wrong side of the trade and liquidating their positions. If you're long euros, you're forced to get out."
Long positions are bets a currency will appreciate.
On Thursday, the dollar shrugged off the Philadelphia Federal Reserve's index for business conditions in May, which fall sharply to 7.3, almost a two-year low, from 25.3 in April.
The market also ignored a soft reading of core US consumer inflation for April.
Both reports helped push down benchmark US government bond yields to three-month lows below 4.10 percent on the view that the soft economic data could mean less aggressive Federal Reserve moves on US interest rates.
But most market players still expect the Fed to continue its tightening campaign, which would widen the dollar's rate advantage over other major currencies.
Eight straight rate rises to 3 percent since last June have helped outweigh worries about rising trade and budget deficits.
Most analysts expect rates to stay unchanged at 2 percent in the euro zone and at virtually zero percent in Japan, where the BOJ's so-called quantitative easing policy has pinned down rates for more than four years.
Sentiment toward the euro deteriorated as euro zone economic data continue to come in on the soft side and political risks also weigh. France, the second-largest economy in the eurozone reported growth of 0.2 percent in the first quarter, less than the 0.4 percent expected.
Separately, the French referendum on the new European Union constitution later this month might reject the treaty.
"We think that the general principle should be to be short of European currencies and long of others," wrote Steve Barrow, chief currency strategist at Bear Stearns, in a research note on Friday.