Dollar bulls get early Christmas present after strong US GDP

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The dollar hovered at its highest in nearly nine years against a basket of major currencies on Wednesday after stunningly strong U.S. economic growth spurred markets to bring forward the timing of a likely hike in interest rates.

The dollar index reached highs not seen since April 2006 as the euro sank to a fresh 28-month low of $1.2165, slipping below an important support from its 200-month moving average at $1.2230.

The greenback rose to as high as 120.82 on Monday, coming almost within a full yen of a 7-1/2 year high of 121.86 yen reached earlier in the month before Japanese exporters' selling pushed it back to 120.36 yen.

Revised figures on Tuesday showed the U.S. economy grew at an annualized 5.0 percent clip in the third quarter, its quickest pace in 11 years.

"When you look at the strong U.S. GDP numbers, you really have no choice but to buy the dollar," said Takahiro Suzuki, vice president of forex at Nomura Securities. "I think the euro could fall below $1.20 as soon as January."

Read MoreAs American economy roars, US dollar soars

The upbeat data drove U.S. stocks to yet another record close and prompted another move higher in U.S. yields. The two-year yield jumped to 0.747 percent, reaching a high not seen in almost four years.

Traders suspect U.S. yields will rise even further as markets fine tunes expectations of the timing of an eventual rate hike, a factor that is likely to underpin the greenback.

The dollar index is up more than 12 percent so far this year, on track for its best annual performance in nearly a decade. To be sure, the rally only took off in the second half of 2014, a long time coming for those who had turned bullish this time last year.

The 'buy-the-dollar' trend should persist given little incentive for investors to look at either the euro or yen with central banks in the euro zone and Japan under pressure to stimulate economic growth.

Traders said a risk to this outlook came from Russia, where the ruble currency recently went into a tailspin, sparking fears of contagion across emerging markets.

Last week's ruble meltdown sparked a flight to safety that saw currencies such as the Swiss franc surge. That forced the Swiss National Bank (SNB) to announce a negative interest rate for the first time since the 1970s in order to stem the inflow.

"Looking into next year a more significant rout in emerging markets could lead to more defensive action from central banks such as the SNB and the BoJ," said Jane Foley, senior currency strategist at Rabobank.

"It is also likely that other central banks will be keeping one eye on emerging markets next year, not least the Federal Reserve."

Commodity currencies are also likely to remain out of favor early in 2015 given slowing global demand has seen oil and iron ore prices tumble.

The Australian dollar is expected to fall below 80 U.S. cents in the months ahead, having shed over 9 percent so far this year to a 4-1/2 year low of $0.8087.