The dollar climbed to a five-week peak against the euro and a seven-week high versus a major currency basket on Thursday as data indicated a generally stable economy, suggesting the Federal Reserve's monetary easing could slow.
Investors focused on the positive aspects of the U.S. spending and core inflation data as well as a key manufacturing survey for April and shrugged off higher-than-expected U.S. initial jobless claims.
"The ISM data shows manufacturing is not deteriorating further and as long as we keep getting status-quo, non-deteriorating numbers the market will buy the dollar.
That's the psychology of the currency market right now," said Joseph Trevisani, chief market analyst, at FX Solutions in Saddle River, N.J.
The Institute for Supply Management said its index of national factory activity was unchanged in April from March at 48.6, indicating that manufacturing contracted for the third straight month but not as much as economists had expected.
The euro fell to a five-week low against the dollar to $1.5438, according to Reuters data, but traded back up to $1.5457, down 1 percent. Traders said markets earlier ran stop-losses in euro/dollar below $1.5490, accelerating the currency's decline.
Most market participants now expect a lower trading range between $1.52-$1.57 after the euro rose to a record peak above $1.60 last week.
"Nobody can come up with a good reason to buy the euro right now. Euro-zone growth probably won't return to 2.5 percent and the ECB is not likely to raise interest rates," Trevisani said, referring to the European Central Bank.
Benchmark euro zone interest rates are currently at 4 percent.
In contrast, a series of interest rate cuts by the Fed has helped shore up the ailing U.S. economy and it's likely that the central bank will not ease further, he added.
The Fed cut rates by 25 basis points to 2 percent on Wednesday, as most had expected.
Against a basket of currencies, the dollar rose nearly 1 percent to 73.305, after earlier hitting a peak of 73.328, the highest level since March 11.
Earlier in the session, the government released data on the the Fed's preferred gauge of inflation, the core personal consumption expenditures, or PCE, price index, which was higher than market expectations, while U.S. personal spending rose twice as much as forecast despite a cooling economy.
The data blunted the sting of the U.S. jobless claims number and backed a growing view that the U.S. economy is in far better shape than many people had thought.
"We had pretty bad numbers out of the U.S., but they were not terrible," said Rafael Martorell, chief FX dealer at BNP Paribas in New York.
"So that's helping the dollar against the euro. And when the euro is down the G7 is happy because oil comes down and all other commodities, and the bubble we're having in that sector is slowly coming off." he added.
Markets have shifted their focus from the Fed's failure to signal a definitive end to rate cuts to worries about the health of the euro-zone economy.
A run of weak sentiment data from the euro zone has stoked expectations that the ECB may soon tone down its hawkish rhetoric and gradually embark on its own monetary easing.
The Fed statement on Wednesday, meanwhile, signaled that its next move would depend on developments in financial markets and the economy. The statement disappointed some investors who had expected a clear sign that the Fed was done with cutting rates after dishing out 325 basis points of cuts since mid-September.
Against the yen, the dollar edged up to 104.00.
The dollar rose 1.2 percent against the Swiss franc to 1.0479 after hitting a two-month high at 1.0499. The British pound fell 0.6 percent to $1.9738.