The dollar kept its grip on a two-month high versus the euro on Thursday after upbeat economic data reaffirmed the view that likely future US interest rate rises would lure more funds to the United States. Consumer price data landed in line with forecasts, supporting investor expectations that the Federal Reserve would gradually raise its benchmark interest rate to at least three percent by mid-year, from 2.25 percent now.
Dealers said, however, that the dollar had stalled ahead of President George W. Bush's inaugural address later on Thursday, with some expecting the US leader to point to concrete plans to deal with the huge US budget deficit.
Many people are still bearish on the dollar in the long term due to the twin deficits issue, said Hideaki Furumaya, a forex manager at Trust and Custody Services Bank in Tokyo.
"For the dollar to hold on to any gains it's pretty important the US comes out with some sort of plan to narrow the budget deficit," he said.
Many don't expect Bush to unveil any plan to deal with the deficit until his State of the Union address in two weeks, but traders said they were still wary of surprises.
The euro bought around $1.3000 slightly down from late US levels and near a two-month low of $1.2964 struck on Wednesday.
The dollar, however, slipped around 0.1 percent against the yen on the day to 102.60 yen after rising just short of 103 yen, a level it has failed to punch through in the last three days.
Against sterling it was little changed at $1.8715.
The dollar has lost around 32 percent against the euro and 22 percent against the yen since January 2002, driven by concerns that the United States will struggle to attract enough capital from overseas to finance its growing external deficit.
A large budget deficit exacerbates the current account problem because US savings are so low that much of the gap has to be funded with foreign capital.
The dollar gained some support from data on Wednesday that showed the core consumer price index rose 0.2 percent last month - in line with market expectations.
Some traders said the dollar was also helped by speculation that US multinational companies may repatriate their funds to take advantage of a tax break.
The break allows companies to return earnings from foreign subsidiaries to the United States at a tax rate of 5.25% instead of the normal 35 percent top corporate rate.
Drug-maker Johnson & Johnson said on Wednesday it would repatriate about $11 billion in past earnings, while Pfizer said it was considering repatriating up to $38 billion.
"Because of the tax system, US companies seem to be repatriating funds. It's clearly supporting the dollar," said Takehiko Jimbo, forex manager at Mitsubishi Trust and Banking.
The dollar was unable to gain ground against the yen, however, which was supported by speculation that Asian currencies will rise if China revalues its yuan.
Traders said the yen was bought as a proxy for the yuan, as China's capital controls make speculative buying in the yuan difficult.
"Even if you think the yuan will go up, you can't buy the yuan. So you will probably need to buy the yen instead," said Takashi Toyahara, forex manager at Nomura Securities.
Group of Seven nations are expected to press for China to revalue the yuan, which is virtually pegged to the dollar, at a meeting in early February.
Dealers said they would be paying close attention to appearances by Federal Reserve Bank of St. Louis President William Poole and San Francisco Fed President Janet Yellen, who are both due to speak on the US economic outlook later today.
Yellen rocked foreign exchange markets with comments in October that despite a large and growing current account deficit, the dollar's value remained "relatively high".