The dollar consolidated gains after hitting a one-month high on Thursday against a basket of currencies as US Treasury yields rose, prompting investors to unwind some of their dollar shorts.
Hawkish rhetoric by the US Federal Reserve has bond yields threatening to break out of their multi-month trading ranges, leaving market watchers dubious about a fundamental change in the outlook for the US economy.
“In our view, this is a corrective move higher and the long-term outlook for the dollar still remained lower,” said Stephen Gallo, European head of FX Strategy for BMO Financial Group in London.
The dollar has gained more than 1.2 per cent against a basket of currencies and is on track to post its best weekly performance this year on hopes that US President Donald Trump's administration may be making progress on tax reforms.
On Thursday, the dollar was flat at 93.34 against a basket of currencies. It has gained 2.5 per cent since hitting a 2 1/2-year low of 91.35 in mid-September. But on an annual basis, the dollar was poised for its biggest drop since 2004.
The tax proposal faces an uphill battle in the US Congress, with Trump's own Republican Party divided over it and Democrats hostile.
But the plan's release, along with recent hawkish rhetoric from the US central bank, has raised the likelihood of a US rate increase by December to 70 per cent compared with less than a third a month earlier. Speculators began to unwind short dollar bets, which had grown to multi-year highs.
“This is probably the best time for the US to raise interest rates, as short-term growth indicators look robust and market volatility is near record lows and financial markets healthy and near record highs,” said Yassir Benjelloun Touimi, a portfolio manager at Dalton Strategic Partnership LLP in London.
In an outlook report for the next 12 months, money managers at Pacific Investment Management Co said real gross domestic product is expected to grow 3 per cent in 2018 with low near-term recession risks.
The US 10-year Treasury yield rose to 2.3590 per cent, its highest level since mid-July and was nearing the top end of a trading range established since early May.
Including the current move, the US 10-year yield has risen more than 12 basis points - putting it on track for its biggest two-day rise in more than seven months.
The dollar's gains were more pronounced against currencies where the domestic story has worsened in recent days, such as the euro and the Japanese yen.
Japanese Prime Minister Shinzo Abe called a snap election as the main opposition Democratic Party threw its support behind a fledgling party led by Tokyo's popular governor, Yuriko Koike, in the Oct. 22 vote. The euro has struggled this week after the unexpected outcome of the German elections.
The euro bounced and rose 0.25 per cent against the dollar after posting some chunky losses this week as German inflation data was broadly along market expectations.