Dollar Rallies on Fed Signals and Factory Data

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The U.S. dollar advanced to a two-week high against major currencies on Thursday and looked likely to extend gains after the Federal Reserve signaled it would begin withdrawing its stimulus programs this year as the U.S. economy improves.

Stronger-than-expected data on factory activity in the U.S. mid-Atlantic region and in home resales added to the dollar's momentum, overshadowing an earlier report showing a rise in weekly jobless claims.

Investors re-established bullish bets on the dollar after Fed Chairman Ben Bernanke, following the central bank's two-day policy meeting that concluded on Wednesday, said the Fed was likely to end its bond-buying program by mid-2014.

(Read More: Dow Tumbles 200, Stocks Drop 1% on Fed Exit Fears; Vix Surges 15%)

"To the extent that (Quantitative Easing) represented a drag on the currency, I think that the prospect of less QE (and) higher interest rates is something that should help the dollar, particularly in an environment where some other central banks are still moving in the other direction," said Robert Lynch, senior currency strategist at HSBC in New York.

Benchmark U.S. Treasuries yields rose to their highest in almost two years after Bernanke's remarks. Traders of short-term U.S. interest rate futures now expect the Fed to begin lifting its target for short-term borrowing costs in late 2014.

In contrast to the Fed's stance, the Bank of Japan recently unveiled aggressive easing measures to fight deflation and pledged to do more if needed. Pressure is also growing on the European Central Bank to take steps to stem deterioration in the euro zone's economy.

Analysts said the dollar's resurgence could put an end to the recent resilience of the euro, potentially pushing it below $1.30 as markets become wary about the prospect of lower ECB interest rates.

"The U.S. growth story is still the most convincing in G-4," said Valentin Marinov, currency strategist at Citigroup in London. G-4 refers to the economies of the United States, the euro zone, Japan and Britain.


"$1.30 could be on the cards for euro/dollar heading into the ECB meeting on July 4."

The euro fell 0.6 percent to last trade at $1.3219, with sentiment hurt by surveys showing the euro zone private sector has yet to make a steady recovery. It fell as low as $1.3161, a two-week low.

Supports are reported at the 100-day moving average at $1.3094 and the 200-day average at $1.3072.

Analysts at Westpac said they added a short euro position to their portfolio and would add more on any rebound to $1.3350.

The dollar rose 1.0 percent to 97.36 yen, having hit 98.28 yen, according to Reuters data, its strongest in more than a week. Some analysts forecast a rise back above 100 yen due to the contrast between the U.S. monetary policy outlook and aggressive easing in Japan.

The dollar index, which measures dollar performance against a basket of currencies, hit a two-week peak of 82.15 and was last up 0.5 percent at 81.80.

The dollar broke away from the pattern over recent weeks in which it often fell against the yen in tandem with share prices. U.S. shares fell more than 1 percent, while Japan's Nikkei ended down 1.7 percent.

The Australian dollar hit a 33-month low against the dollar, tracking steep falls in riskier and emerging currencies and after data showed China's manufacturing sector weakened in June to a nine-month low.

(Read More: Slump Strips Aussie Dollar of 'Poster Child' Status)

It hit a low of $0.9160 and was last down 1.0 percent at $0.9198. The New Zealand dollar lost 1.7 percent to last trade at $0.776.

Morgan Stanley analysts said the Australian dollar was the most vulnerable major currency and that they would look to sell rebounds to $0.9330, targeting a deeper decline towards $0.8500.