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US dollar advances after strong US data, Fed minutes
[NEW YORK] The US dollar rallied on Wednesday on upbeat US manufacturing and construction data and after minutes from the Federal Reserve's last policy meeting showed the central bank remained on track to raise interest rates several times this year.
Snapping a three-week losing streak, the US dollar hit session highs against the euro and yen after the minutes from the Fed's Dec 12-13 meeting. The US dollar index posted its largest daily gain in more than two weeks.
The Fed's minutes acknowledged the US labour market's solid gains and the expansion in economic activity, even as they affirmed policymakers' worries about persistently low inflation. That suggested the central bank will continue to pursue a gradual approach in raising rates but could pick up the pace if inflation accelerates.
Fed officials also discussed the possibility that the Trump administration's tax cuts or easy financial conditions could cause inflation pressures to rise, leading to some dollar-buying, analysts said.
"The debate is the same. You have strong growth and low unemployment on one side and surprisingly low inflation on the other side," said Stephen Stanley, chief economist at Amherst Pierpont Securities in Stamford, Connecticut.
"They have been taking a middle-of-the-road on their policy approach, gradually raising interest rates and unwinding the balance sheet. They will continue the same tack."
The US dollar gained earlier in the session after data showed US construction spending rose 0.8 per cent in November to an all-time high of US$1.257 trillion, driven by a surge in investment in private residential and nonresidential projects.
At the same time, a US manufacturing index as measured by the Institute for Supply Management rose to 59.7 last month, beating market expectations.
Still, analysts remained skeptical about the dollar's near-term prospects, noting the expected rate hikes have been priced in. Some also said modest US inflation may encourage the Fed to go slower in raising rates.
In late trading, the US dollar bounced 0.3 per cent to 92.18 after falling 2.5 per cent over the last three weeks. The US dollar's 10 per cent drop in 2017 was the largest annual decline in 14 years.
The greenback also rose 0.2 per cent versus the yen to 112.51 yen on Wednesday.
Friday's US non-farm payrolls report should provide more clarity about the outlook for interest rates this year.
The euro, meanwhile, slid 0.3 per cent to US$1.2016 after hitting a four-month high of US$1.2081 on Tuesday, up roughly 3 per cent from a mid-December trough.
The single European currency has been supported by improving prospects for the euro zone economy and expectations the European Central Bank will wind down its bond-buying stimulus in 2018.