The dollar hit a six-week high versus a basket of currencies on Friday as strong US data the previous session eased some of the more extreme fears for the US economy and more aggressive bets for lower interest rates.
Both US retail sales and producer prices for November beat market expectations and strengthened the view that the US economy is more resilient than previously thought, and could well avoid a recession despite a lingering credit crunch.
US consumer price inflation data later in the day could be key in either cementing that view or prompting a wave of profit taking on the dollar's gains.
"Strong inflation and strong retail sales mean that it's less likely that the Federal Reserve will have to cut rates as much as expected," said Jonas Ahlander, chief FX strategist at SEB Merchant Banking in Stockholm.
By 1200 GMT the euro had fallen by nearly 1 percent to as low as $1.4487, its lowest in over a month as an upwardly revised figure showing euro zone inflation data reaching its highest since May 2001 did little to boost the currency. The yen also fell to its lowest levels in over a month versus the dollar as a below-forecast tankan survey backed the argument that the Japanese economy is still too weak to warrant any more rate hikes from an ultra-low 0.5 percent.
The weakening of the yen made it a more attractive currency to borrow in so-called carry trades, to fund purchases of higher return units like the New Zealand dollar.
The dollar was up 0.7 percent at 113.05 yen, its highest since November 8. Against a basket of currencies the dollar hit 77.171, its highest since late October. The US November producer price index rose 3.2 percent from October, the largest rise in 34 years, data on Thursday showed, while retail sales exceeded market expectations and suggested credit problems have not yet hurt spending.
The surprisingly solid data appeared to support the modest scale of the Federal Reserve's quarter-point interest rate cut on Tuesday, despite criticism the US central bank could have cut rates more aggressively to address the credit crisis.
The day after cutting its benchmark federal funds rate by a quarter point to 4.25 percent, the Fed and several other major central banks unveiled their plan to ease the global money market crunch. However, investors remained cautious about the likely effectiveness of the new liquidity boosting measures, as well as about the health of the US economy.
"Our judgement is that the market is going to need more evidence that the US economy is in the clear - and resilience in the consumer during the Christmas season heading into 2008 - for the dollar to find sustained strength," Societe Generale said in a research note.
Dollar, euro and sterling London interbank offered rates (Libor) all fell on Friday for the second straight day following Wednesday's co-ordinated central bank liquidity plan.
But the scale of decline was even more marginal than Thursday's modest move, suggesting it will be some time before banks start lending to each other again.
Investors will now look to US CPI at 1330 GMT, followed by industrial production at 1415 GMT for further clues on the outlook for the US economy and prospects for interest rates.
As well as data, investors are paying close attention to news from the financial sector, with more US banks reporting results next week. The dollar's gains were briefly tempered in Asian trade by Moody's ratings downgrade of Citigroup, hit hard by its exposure to subprime mortgage defaults.
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