Dollar rallies across board on signs of healthy recovery

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The dollar rallied across the board on Wednesday, bolstered by a rise in U.S. Treasury yields that suggested the ongoing recovery in the world's largest economy was firmly on track.

Better-than-expected U.S. housing data also supported the dollar, which rose for the first time in four sessions against a basket of currencies. U.S. Treasuries yields were also higher on the day.

A U.S. Treasury sale on Wednesday of $35 billion in new five-year notes met with relatively low demand. "The dollar is being supported by higher yields right now, suggesting that the ongoing recovery in the U.S. is still positive overall," said Brian Kim, currency strategist, at RBS Securities in Stamford, Conn.

New U.S. home sales jumped to a five-year high in June, while other data on Wednesday showed an acceleration in factory activity in July, boosting hopes of a third-quarter pick-up in economic growth.

(Read more: New home sales surge to five-year high despite higher rates)

In afternoon trading, the dollar index was up 0.4 percent to 82.27, rising after three days of losses.

The euro, on the other hand, fell from a one-month high of $1.3256. It was last down 0.2 percent at $1.3198. There were offers to sell the euro above $1.3260/70, particularly from Asian central banks.

Volume on the euro/dollar pair totaled $4.5 billion on the Reuters FX platform.

Europe's common currency was earlier boosted by a quicker-than-anticipated expansion in German and French private sector business activity, a sign of recovery in the euro zone economy. German and French PMI surveys, meanwhile, both beat expectations and led some investors to trim bets against the euro.

Overall, the business polls indicated that the euro zone economy was likely to expand in the current quarter. That news was in stark contrast to the weaker PMI data out of China, which earlier triggered safe-haven inflows into the U.S. dollar and toppled the growth-linked Australian dollar from a four-week high.

(Read More: China July flash HSBC PMI plunges to 11-month low)

"The euro rally earlier reflects the outperformance of the German and French PMI data, which contrasted with some of the key PMI releases overnight such as China," said Greg Moore, currency strategist at TD Securities in Toronto.


Given "forward guidance" from the European Central Bank that it will keep monetary policy accommodative and perhaps even lower rates to boost growth, any euro gains are likely to be held in check, traders said.

In contrast to the ECB, the Federal Reserve is considering scaling back its ultra-loose monetary stimulus as the U.S. economy outperforms, although it is keeping its options open should the economy weaken again.

(Read more: Earnings threat: Strong dollar)

The contrast in ECB's and Fed's monetary policy has led to a widening in yield spreads between U.S. Treasuries and German Bunds. While spreads have narrowed since Fed Chairman Ben Bernanke indicated any slowing of the U.S. central bank's stimulus would be data-dependent, the gap between the benchmark 10-year bonds remains near its highest in almost seven years.

In other currencies, the Australian dollar, which is highly sensitive to economic data from China, fell sharply after the China PMI data. It was last trading 1.4 percent lower at US$0.9166, down from an intraday high of US$0.9317.

The dollar was 0.9 percent higher against the yen at 100.25 yen, while the euro rose 0.6 percent versus the Japanese currency to 132.31 yen. Just $1.4 billion changed hands on Wednesday.

(Read more: Dollar-yen at 102 (not 100) is more crucial: Charts)