The dollar rose half a percent against major currencies on Thursday, hitting four-week highs against the yen, after minutes from the Federal Reserve's latest policy meeting raised expectations of a US rate hike in June.
The dollar suffered a temporary setback during the European session after an unexpected rise in eurozone Purchasing Managers Index (PMI) for May, fuelling speculation that the European Central Bank could raise interest rates by a half rather than a quarter percentage point next week.
Minutes released on Wednesday from the May 10 US Fed meeting showed policymakers were not sure how much higher rates should climb, if at all, but a mention that inflationary pressures were increasing helped boost expectations that rates would rise.
A sell-off in emerging markets, commodities and metals - including a 2 percent drop in the price of spot gold and 4.5 percent in silver - also prompted buying of dollars as people reinvested their money in the US currency.
"The minutes were the main catalyst for the uptrend in the dollar, but metals prices were fairly weak overnight," said Adrian Schmidt, currency strategist at RBS Financial Markets.
"The eurozone data was decently strong, strong enough for a rate hike in June and the markets are looking at the risk of 50 basis points."
The dollar rose to a four-week high of 113.27 yen, with traders citing buy orders around the 113 and 113.10 levels, and was trading close to those highs at 1142 GMT.
The dollar also rose to its highest in three days against the euro at $1.2736. It ticked briefly lower after Venezuela said it was considering switching some oil sales to euros from dollars.
The RBS/NTC eurozone PMI rose to 57.0 in May from 56.7 in April, against forecasts for a fall to 56.5, showing that the bloc's manufacturing sector expanded at its fastest pace in nearly six years last month.
"The data is stronger than expected. The outlook remains positive for the eurozone's economy. There's not an insignificant risk that the ECB will go for 50 basis points next week and this (data) reinforces those views," said Kamal Sharma, currency strategist at Bank of America.
Eurozone rates are currently at 2.5 percent, exactly half the level of US interest rates. Revised eurozone gross domestic product (GDP) data for the first quarter showed growth of 0.6 percent on the quarter, and 1.9 percent on the year.
The eurozone economy should grow faster than previously expected in coming quarters, the European Commission said. In the United States, the Institute for Supply Management's manufacturing index is due at 1400 GMT and is forecast to fall to 55.5 from 57.3. The Fed minutes offered an incentive to buy back the dollar in a market rattled by concerns about the recent sell-off in world share markets and uncertainty about US currency policy once Henry Paulson replaces John Snow as Treasury Secretary.
The US currency came under pressure after calls in April from the Group of Seven economic powers for appreciation in Asian currencies sparked speculation that Washington wants a weaker dollar to stem the ballooning US current deficit.
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