Dollar bulls appear to be back in the driving seat but analysts warn the good times are not expected to last that long as the firm U.S. currency faces a tougher time pushing higher amid mixed economic data and growing signs of a recovery in Europe.
The greenback rose almost 1 percent against the euro overnight Wednesday, bouncing back from losses suffered in the wake of Friday's weaker-than-expected March U.S. jobs data.
"Dollar bulls are back in control and they plan to take the greenback higher," said Kathy Lien, managing director for currency strategy at BK Asset Management, in a note.
"The general demand for risk assets and specific appetite for U.S. dollars in the last 48 hours tells us that investors have dismissed the soft [payrolls] release as a one month correction that will not affect the Federal Reserve's plans to tighten," she added.
The dollar index, which measures the dollar's value against a basket of other major currencies, was trading at 97.86 on Wednesday. That's down almost 3 percent from a 12-year high hit last month, but still up some 8 percent from where it ended 2014.
And it's the perception that U.S. interest rates will head higher while Europe and Japan continue with monetary stimulus that will continue to bolster the dollar in the months ahead, analysts said.
But they add, that the climb may not be as smooth has it has been in recent months.
Camilla Sutton, managing director and chief FX strategist at Scotiabank, said the dollar was now looking at a period of range trading – a contrast to the start of the year when everything was lined up for a strong currency.
"That has faded and now it's a range trade with uneven data, signs of an improvement out of Europe, some weakness out of the U.S. and all of that is creating this environment where people are having a second look at the dollar and holding it long against absolutely everything," she told CNBC.
Analysts say the dollar strength over the past year, which will push up the price of exports and make imported goods cheaper, is also weighing on the U.S. economy and is something that is likely to become evident with the earnings season, which unofficially kicks off Wednesday with results from aluminium firm Alcoa.
Data out of Europe meanwhile has generally been encouraging, lending some support to a battered euro. Price discounting boosted growth in all of the euro zone's biggest economies last month, helping business activity rise at its fastest rate in almost a year, data released on Tuesday showed.
"The fundamentals are there to support a stronger dollar but at a much slower pace than what we saw in Q1 with 10,11 percent appreciation against a host of currencies," Sutton added.
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