Dollar gains on strong US data; UK pound jumps

The dollar rose on Friday after fresh U.S. data supported the view the world's largest economy is improving enough to keep the Federal Reserve's stimulus-reducing measures on track.

U.S. industrial output rose at its fastest clip in 3-1/2 years in the fourth quarter, data showed Friday. Separately, groundbreaking for new homes last month dropped 9.8 percent, the largest percentage decline since April, but housing starts were coming off a multi-year high in November.

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The dollar index, a gauge of the dollar's value versus six major currencies, rose 0.3 percent to 81.11. In early afternoon trading, the euro was down 0.5 percent against the dollar to $1.3555.

"Overall, the U.S. economy is making steady, if uneven, progress and that should keep intact expectations for sustained Fed tapering this year," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

"U.S. Treasury yields haven't budged much, so as long as they hold near their elevated levels, that should continue to underpin the dollar."

(Read more: 2014 a 'litmus test' for Australia economy: Goldman)

The British pound, meanwhile, was one of the biggest movers of the day, rising 0.5 percent to $1.6434 following strong UK retail sales data.

British retail sales spiked 2.6 percent in December to show an annual rise in volumes of 5.3 percent—the fastest growth since October 2004—Office of National Statistics data showed on Friday.

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Whether the 5.3 percent annual jump points to a sustainable recovery in Britain and more fuel for the pound is unclear. Strong spending around Christmas may well have been chiefly on credit and unless wages start to grow in real terms, the Bank of England may be justified in sticking with ultra-low interest rates well into next year.

The was pounded on Friday, falling more than 1 percent on the day to US$0.8263.

(Read more: Goldman: How Europe outperforms in 2014)

The kiwi has been rallying in recent months on expectations that the Reserve Bank of New Zealand was on the verge of raising interest rates. But traders say some hedge funds have taken profit on the kiwi's gains against the Australian dollar this week by buying U.S. dollars.

"In our G-10 valuation table it is the New Zealand dollar that now tops the list as the most over-valued currency," Bank of Tokyo-Mitsubishi UFJ analyst Derek Halpenny said.

"Given how well priced an RBNZ rate hike is this year, we would not expect strong buying from current levels if the RBNZ does hike this year."

—By Reuters