The dollar held firm on Wednesday, bolstered by further evidence that the US economic recovery is becoming self-sustaining, while a correction in high-flying commodity prices pressured the Australian dollar. Market players said the dollar's rise and a drop in commodities this week was driven by position unwinding, with investors trimming back some of the bets made before the year-end.
The dollar index, which measures the greenback's value against major currencies, edged up 0.2 percent to 79.586. The index is up 0.6 percent this week, regaining some ground after sliding 1.8 percent last week. Since the market has priced in positive readings in US economic data this week, including Friday's key jobs data, there is a possibility the market will be swayed more by weaker-than-expected numbers, some traders said.
The euro dipped 0.3 percent to $1.3272 and the dollar held steady against the yen at 82.08 yen. Ayako Sera, market strategist at Sumitomo Trust & Banking in Tokyo, warned against reading too much into the previous day's slide in commodities.
The Australian dollar slipped 0.3 percent to $1.0020, extending its losses after shedding 1.2 percent the previous day, when gold and oil both fell more than 2 percent. The Australian currency has taken a hit this week as investors fear that widespread floods in the country's north-east will hit production of coal, the nation's biggest export.
A year-end rally in thin trade had driven the Aussie to a 28-year high around $1.0257 last Friday, pushing the relative strength index (RSI) towards overbought territory and setting the scene for a consolidation in the short term. Over the next three months, the Australian dollar is likely to retreat to around $0.99, on the back of a stronger US dollar, Forrester said.