The dollar hit a four-month high on Wednesday after a rise in benchmark U.S. Treasury yields above 3 percent rattled some currency bears and led investors to consider whether the greenback was breaking out of a prolonged weak spell.
The U.S. 10-year treasury yield has risen to its highest in more than four years, driven by worries about the growing supply of government debt and inflationary pressures from rising oil prices.
That has caused U.S.-Japan and U.S.-German yield differentials to widen further in the dollar's favor, leaving the yen and the euro lower.
Analysts on Wednesday saw signs the dollar could be breaking higher after months of relative weakness.
"The market is coming to the realization that U.S. growth is actually good. And Q1 data is probably not going to be as bad as some of the pessimists expected," said Thierry Wizman, global interest rates and currencies strategist at Macquarie Limited in New York.
U.S. first-quarter gross domestic product data due on Friday could determine whether the dollar extends its gains further. Growth expectations have been cut significantly since the start of the year: the Atlanta Federal Reserve cut its forecast to 2.0 percent from 4.2 percent in January. But that 2.0 percent is a step up from the 1.9 percent forecast on April 16, suggesting optimism.
The dollar's performance against a basket of major currencies rose to as high as 91.241 in early New York trade, its strongest level since Jan. 12. The dollar index last stood at 91.18, up 0.46 percent on the day.
The dollar's gains on Wednesday drove the euro down past the two-month low hit on Tuesday because of concerns that firmer U.S. yields would reduce demand for the region's bonds at a time when hedge funds have amassed record long euro bets.
Analysts say the market needs clarity about the European Central Bank's pace of planned rate hikes before the euro can break higher.
In early 2018 traders bet that synchronized global growth would force the ECB to accelerate monetary policy normalization. But weak data suggests there will be no change to interest rates announced at the end of the central bank's meeting on Thursday.
"It's hard to envision (the ECB) will want to communicate a stronger conviction about normalization... in the context of weaker European data and a Bank of England that seems to have already signaled, through Carneys comments, that it will not raise in May," said Wizman.
The rise in bond yields also weakened Asian emerging market currencies versus the dollar on Wednesday, with the Chinese yuan down and the Indonesian rupiah trading near a two-year low of 13,923 per dollar.
Against the yen, the dollar hit a two-month high of 109.34 yen. It was last up 0.49 percent at 109.34 yen.