The dollar slid against the euro on Thursday, after two days of gains as Federal Reserve officials downplayed expectations the U.S. central bank would start scaling back its stimulus program and said the Fed could buy bonds again if the economy weakens.
U.S. economic data on Thursday was also not strong enough to bring forward investor expectations for the timing of the official end to this round of the Fed's so-called quantitative easing.
While U.S. consumer spending rebounded in May and new applications for unemployment benefits fell last week, they were not blockbuster numbers, which suggested that the U.S. economy remains on a moderate growth path.
Meanwhile, the Japanese yen fell, partly pressured by the Fed officials' comments. When talk about the Fed tapering its bond-buying program started weeks ago, the yen had benefited along with the dollar as investors started moving away from riskier currencies and toward safe havens.
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Greg Moore, a currency strategist at TD Securities in Toronto, said the overall message of the latest Fed comments seemed to be that the market had been a little aggressive in pricing in an early reduction of the U.S. central bank's asset purchase program.
"Basically, the Fed speakers were saying that nothing has changed and the exit from quantitative easing remains data-dependent. And that may have taken the steam out of the dollar a little bit," he said.
William Dudley, the influential head of the New York Fed, said on Thursday the U.S. central bank's asset purchases could be more aggressive than Bernanke outlined last week if economic growth and the labor market turn out weaker than expected.
Also on Thursday, Fed Board Governor Jerome Powell said financial markets have over reacted to the U.S. central bank's statements and have brought expectations of the first Fed rate hike too far forward.
That said, analysts said the dollar's uptrend remained intact. Even if the Fed does not start reducing stimulus measures later this year, as indicated by Fed Chairman Ben Bernanke last week, the U.S. economic recovery still leads that of other major economies, such as the euro zone, Japan and China.
Overall, the U.S. dollar still remains the strongest net bought currency across the board, according to data from BNY Mellon.
In late afternoon trading, the euro was up 0.2 percent against the dollar at $1.3041, with the session low at $1.2999.
BNP Paribas said it has initiated a short euro/dollar trade at $1.3035, targeting a move to $1.2640, with stops at $1.3250.
"The changing paradigm for the Fed boosts yield support for the dollar, while the European Central Bank remains relatively dovish. Accordingly, the prospects for euro/dollar downside are rising," said BNP Paribas in a research note.
The dollar index, which measures the U.S. currency against a basket of currencies, was down 0.1 percent at 82.916, after earlier touching a three-week high of 83.171.
The greenback overall has benefited from a rise in U.S. yields as more investors factored in the probability the Fed will start to wind down its $85 billion monthly asset purchase program later this year.
The dollar gained against the yen as U.S. Treasury yields rose after data showed pending home sales data for May rose 6.7 percent, far above economists' estimates of a 1 percent gain but that was not enough to alter the overall theme for currency trading.
The dollar last traded up 0.7 percent at 98.30 yen, edging toward Monday's peak of 98.70 yen. But traders said its rise could be capped on large sell orders above 98.70 yen.
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