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Dollar Gives Back Earlier Gains Against Major Currencies

The dollar rose briefly against the major currencies after the Reuters/University of Michigan Surveys of Consumers preliminary reading for January beat forecasts, decreasing expectations for a cut in U.S. interest rates any time soon.

The report came in at 98, well above Wall Street expectations for a reading of 92.5.

"Definitely, this was a nice upside surprise that continues the run of generally favorable U.S. data that have tempered concerns about the health of the economy," said Alex Beuzelin, senior market analyst, Ruesch International in Washington D.C. "This will further put to rest the notion of an early Fed rate cut."

By noon New York time, the dollar had given up its gains.

A string of solid data on the U.S. economy in recent days had already reduced expectations for an interest rate cut from the Federal Reserve's policy setting committee which next meets January 30 and 31.

The latest report added to that consensus, analysts said, though it will take addition data to send the dollar higher.

"The Michigan report shows the U.S. consumer is still pretty resilient and therefore, we are seeing some support for the dollar this morning," said Gregory Salvaggio, vice president for trading at Tempus Consulting in Washington D.C. "Still, for a another break through last week's levels, we would need more data and more selling pressure from Europe."

Elsewhere, Richmond Fed President Jeffrey Lacker said that the main policy risk to the U.S. economy is for inflation to surge again or not subside, although there are tentative signs of price pressure moderating.

Yen Weakness

Other than U.S. economic data and Fed speakers, dealers and analysts were still focused on the yen, saying further yen weakness was likely, as the Bank of Japan's decision to keep
borrowing costs at 0.25% had given investors renewed vigor for carry trades -- using low-yielding currencies to finance purchases of those giving higher returns.

The BOJ's vote also marked an abrupt shift in expectations and suggested that the Japanese central bank's path towards raising interest rates from zero will take even longer as the economy's expansion has turned patchy.

"It's pretty difficult for them (BOJ) to raise in an environment where CPI has remained so low and there is uncertainty about consumption and the political environment makes it very difficult for them to hike interest rates," said Chris Turner, head of FX strategy at ING in London.

"The burden of proof lies with the strong macro story and until then the yen will probably remain very soft," he added.

The yen earlier hit a new 9-1/2-year low against the Australian dollar and was stuck close to an eight-year low against the pound as currencies where interest rates are relatively high or set to rise further continue to be favored.