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One piece of upbeat U.S. economic data and some comments from the European Central Bank on monetary stimulus: that's all, it seems, the dollar needed to get its zing back.
The greenback hit a two-month high just above 121 yen on Wednesday and extended gains against the euro to a three-week high, as the euro extended the previous session's sharp falls to $1.1062 amid jitters about cash-strapped Greece.
Data on Tuesday showed that U.S. housing starts jumped to their highest in nearly 7-1/2 years in April, while building permits soared. That fueled a rally in the dollar sparked earlier in the day after ECB Executive Board Member, Benoit Coeure, said the central bank could moderately increase its asset buying in May and June.
"It was that old 'one-two' combination of punches," Kit Juckes, macro strategist at Societe Generale, said in a note on Wednesday.
"A jab from Benoit Coeure in the morning news … and then a solid blow from the U.S. housing starts data which finally delivered a well-above expectations increase and suggested that maybe - just maybe - the U.S. economy will enjoy a better spring than winter after all."
The dollar index – a measure of the greenback's value against a basket of currencies – has fallen for five straight weeks after a generally weaker tone in U.S. economic data forced a re-think on the timing of an interest rate rise from the Federal Reserve.
The dollar index was trading at 95.54 in European trade on Wednesday. Currency analysts said the index was close to its 100-day moving average of about 95.53 – an important technical level that could suggest further gains if the dollar holds above it.
"The dollar index is trading around a pivotal level here," Jeremy Stretch, head of currency strategy at CIBC, told CNBC. "If we can make some gains and hold them over next few sessions, the dollar should continue to rebound."
Analysts said economic data was key to the dollar's outlook, and, more immediately, the release of the minutes from the Fed's last meeting which are due out later in the day.
"Clearly, if we see improvements in the data and tone in the minutes that is not more dovish than expected, then the dollar should keep its momentum," Stretch added.
While the dollar index has soared 19 percent over the past year and is up almost 6 percent in the year so far, it has slipped almost 5 percent from a high seen in March as investors push out their expectations for the timing of a U.S. rate hike.
"I think the U.S. dollar is a very good currency to be invested in over the next three years," Hans Redeker, global head of foreign exchange strategy at Morgan Stanley, told CNBC.
Analysts said that recent weaker data reflected bad weather conditions earlier this year and that the economy should rebound in the months ahead, supporting the dollar.
In a note published on Tuesday, Japanese brokerage Nomura said it was sticking to its year-end forecasts for the dollar to rise to 125 yen and the euro to fall to $1.05.