The dollar rallied on Tuesday after US consumer confidence and home sales data beat forecasts, leading to a slight rise in expectations that the Federal Reserve will raise interest rates again next month.
Consumers were more upbeat in July, the figures showed, suggesting record high oil prices still haven't dented the American consumer and helping the dollar gain for a second straight day.
"What we're seeing here is a little relief rally in the dollar, based on a slight shift in expectations for the next Fed meeting," said David Durrant, chief strategist at Julius Baer Investment Management in New York.
The Conference Board's index of consumer sentiment rose in July from June, counter to economists' expectation of a slight drop, and US sales of existing home dipped in June, but by less than economists had expected. The dollar rebounded from steep falls last week sustained after Fed chairman Ben Bernanke said he expected economic growth to slow, moderating inflation.
The euro fell 0.5 percent on the day to $1.2575, but was still more than a cent above last week's three-month low of $1.2456. The dollar was up 0.5 percent on the day versus the yen at 117.20 yen, in sight of a three-month peak of 117.88 yen struck last week.
The yen was under pressure across the board, falling to its lowest in more than 5 months against the Australian dollar, a three-month low versus the New Zealand dollar, and near a record low versus the euro.
Traders say that the yen, along with the Swiss franc, has been hurt by a revival of carry trades in which investors borrow in low-yielding currencies to invest in high yielders such as the Australian and New Zealand dollars.
That partly explains why despite its usual safe-haven status, the Swiss franc has failed to gain from rising tensions in the Middle East over the past week, analysts say. The dollar rose 0.6 percent to 1.2530 Swiss francs.
Investors will be taking a close look at data this week, including US durable goods orders, the Fed's "Beige Book" survey of economic conditions and second quarter US growth.
Any signs of a slowdown in economic growth or a moderating of inflationary pressures would likely validate the view that Bernanke outlined last week, raising the chances that the Fed will pause its rate-rising campaign next month.
For this reason, despite the dollar's gains, trading was confined to narrow ranges ahead of the upcoming data, with the euro and sterling still trapped roughly in the middle of their ranges for the past month.
"I think the markets will want to keep their powder dry for the data later in the week," said Ron Simpson, managing director of currency analysis at Action Economics in Dobbs Ferry, New York.
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