NEW YORK: The dollar dropped from a seven-month high against a basket of currencies on Thursday as investors opted to book profits on concerns it may have rallied too quickly recently due to optimism about the US economy.
While the dollar fell from a three-month peak against the euro and retreated from a 3-1/2-year high versus the yen hit earlier in the week, analysts say the outlook for the US currency remains bright on expectations the US economy is outperforming its major counterparts.
Indeed, the number of Americans filing new claims for unemployment benefits dropped for a third straight week last week, the latest indication the labor market recovery was gaining traction.
Other reports over the past week highlighted improvement in the US labor market and consumer spending. The state of the jobs market is key to US Federal Reserve policy. Should this sector continue to show marked strength the Fed may reconsider its bond buying program, called quantitative easing.
The Fed's bond buying is tantamount to printing money and therefore dilutes the dollar's value.
"Euro/dollar is eyeing the 200-day moving average at $1.2867 as the next downside target after yesterday's clean break below congestive support at $1.3000," said George Davis, chief technical analyst at RBC Capital Markets in Toronto.
"As the 200-day moving average is often used as a guide for long-term trend direction, a daily close below this level would suggest that bullish sentiment is eroding and introduce downside risks from a longer-term perspective," he said.
The euro last traded at $1.3018, up 0.5 percent on the day, rebounding from a session low of $1.2910, the weakest since Dec. 10. Support lies around $1.2876, the 50 percent retracement of the euro's rise from July to February.
Davis said a close above the $1.3089 level is required in order to trigger a euro/dollar retracement phase, but the recent bearish medium-term trend reversal below $1.3213 suggests that valuation-driven retracements toward $1.3259 and $1.3331 will attract renewed selling interest.
The dollar index, which measures the value of the greenback versus a basket of currencies, fell 0.4 percent to 82.558 . It had earlier risen as high as 83.166 on Reuters data, the highest since Aug. 3.
Contrasting with a positive US growth outlook, euro zone employment fell 0.3 percent in the last three months of 2012, data showed on Thursday, intensifying concerns about the region's economic outlook. Data on Wednesday showed a bigger-than-expected drop in euro zone factory output in January
"We're at a point right now where we're going to need some significantly positive news to help the dollar post its next leg higher," said Omer Esiner, chief market analyst, Commonwealth Foreign Exchange, Washington.
"We're going to need confirmation from upcoming US economic data that the optimism surrounding the US recovery is justified."
Political uncertainty in Italy and a likely bailout for Cyprus also kept the euro under pressure. Investors also focused on a EU summit that will discuss budget policies, with signs that France, Spain and Portugal could be given more time to meet their deficit goals as long as they maintain a debt-cutting trend.
DOLLAR SLIPS VERSUS YEN
The dollar last traded at 95.86 yen, down 0.2 percent one the day. Expectations of aggressive policy easing from the Bank of Japan are expected to underpin the dollar, with many traders looking for a retest of the 3 1/2-year high of 96.71 yen hit on Tuesday.
RBC's Davis said the sharp uptrend that has driven dollar/yen higher since last October remains in place.
"Although valuations have moved to overbought levels yet again and increase the scope for a correction, a return back below support at 94.97 yen will be required at a minimum in order to suggest that a retracement is at hand," he said.
"The broader uptrend that is in place suggests that valuation-driven pullbacks to 93.72 yen and 92.58 yen should attract renewed buying interest," he said.
The euro rose 0.1 percent to 124.72 yen, still some way from the 34-month peak around 127.70 set last month.
Meanwhile, the dollar rose to a six-month peak against the Swiss franc and the Norwegian crown after central bank policy decisions and accompanying comments in Switzerland and Norway pushed those currencies lower.
<Center><b><i>Copyright Reuters, 2013</b></i><br></center>
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