The dollar hit a 3-1/2 month high against a basket of currencies on Wednesday after a voting member of the US Federal Reserve's policy-setting committee expressed support for an interest rate hike in September.
Atlanta Federal Reserve President Dennis Lockhart's comments supported dollar bulls, many of whom were having a rethink about whether the Fed would raise rates this year after subdued wages and tepid growth in the first quarter clouded the policy outlook in recent months.
The dollar index was up 0.1 per cent at 98.096, having hit a high of 98.218 in Asian trade, its highest since late April. That took the euro to a two-week low of $1.0847, with a rise in short-dated Treasury yields adding to the dollar's allure as rate differentials moved in its favour.
"More (dollar) gains are dependant on how payrolls data is on Friday and whether earnings are picking up," said Niels Christensen, FX strategist at Nordea. "A good payrolls number will no doubt support Lockhart's view and help the dollar gain more ground."
Lockhart, a voter this year on the Federal Open Market Committee, told the Wall Street Journal that it would take "significant deterioration" in the US economy for him to not support a rate hike in September.
But with the fed funds rate - which enables investors to bet on when US rates will rise - indicating only a 50 per cent chance of liftoff in September, the odds of a hike then are still seen hinging on Friday's US non-farm payrolls data.
Economic data
Before that, the ADP employment and ISM non-manufacturing surveys will be in focus to give investors an idea about whether the economy and employment growth was picking up. Robust numbers will make the Fed more comfortable over the prospect of starting to raise interest rates in a gradual manner.
Meanwhile, the Australian dollar saw profit takers chip away at some of the big gains it made on Tuesday after the Reserve Bank of Australia toned down its call for a weaker currency. The Aussie dipped 0.4 per cent to $0.7350 after surging 1.3 per cent on Tuesday to a two-week high of $0.7428.
"There is little reason to buy commodity currencies like the Aussie right now, and its gains were fuelled mostly by short covering," said Junichi Ishikawa, market analyst at IG Securities in Tokyo.