The dollar marked its lowest level in nearly three months on Wednesday as a string of robust economic data and easing concerns over Egypt took the steam out of safe-haven buying in the currency. Strong manufacturing numbers from the United States and other countries fuelled optimism on global economic growth, with expectations of loose US monetary policy further encouraging risk-taking.
"When investors' risk appetite grows, the dollar becomes a funding currency," said Junya Tanase, a strategist at J.P. Morgan Chase Bank. The dollar index dipped to 76.931, its lowest since early November, grappling with a 76.4 percent retracement of its November rally around 77.00.
Data on Tuesday showed the US manufacturing sector grew at its fastest pace last month since 2004. But unlike in 2004, when the Federal Reserve started pushing up interest rates, the US central bank is still committed to a stimulative policy and a Fed official said another round of bond purchases could be discussed at the Fed's next policy meeting in mid-March if the recovery flags.
The combination of strong growth prospects and an easy policy outlook is encouraging investors to wade into risky trades. The euro climbed as high as $1.3862, its highest since early November, as the common currency continued to benefit from rising expectations that the European Central Bank will go well ahead of its US counterpart in raising rates.
Many traders expect European Central Bank Governor Jean-Claude Trichet to give more warnings on inflation when he holds a news conference on Thursday after data showed earlier this week eurozone inflation rose more than expected. "We could see profit-taking at some point but it's hard to sell the euro before his news conference," said Yuuki Sakasai, a forex strategist at Barclays Capital.
Trichet's news conference will be followed by Federal Reserve Chairman Ben Bernanke's speech on the same day, which could highlight the US central bank's relative dovishness compared with the ECB. The Australian dollar maintained Tuesday's 1.5 percent gain to trade at $1.0110, with stronger commodity prices seen paving the way for the currency to test resistance at $1.0152 and $1.0183.
The dollar rose 0.1 percent on the day to 81.48 yen but remained near a four-week low of 81.31 yen hit on Tuesday. Option-related bids near 81.30 yen are supporting the US currency. In addition, a trendline connecting a November 1 trough of 80.21 and a January 3 low of 80.94 comes in around 81.25-30.
A clear break of this level could open the way for a test of the November 1 low, which sits just above a record low of 79.75 marked in 1995. The greenback was also within striking distance of a record low against the Swiss franc, falling 0.2 percent on the day to as low as 0.9329 franc, compared with its record low of 0.9301 hit late last year.
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