The dollar is on track to post its best weekly performance so far this year as a bounce in US Treasury yields fuelled by the Trump administration's tax plan triggered a shake out in multi-year short bets against the greenback.
While market watchers remain sceptical about the dollar's long-term outlook, citing the long time it will take for the tax plan to become legislation, the greenback has punched above some key levels this week.
“We need to see more clarity on the data front and the progress of the U.S. tax plan through Congress before we become bullish on the dollar,” said Thu Lan Nguyen, an FX strategist at Commerzbank AG in London.
The dollar index, a trade-weighted basket of the greenback against its rivals, was broadly flat at 93.12. It has gained more than 1 per cent this week, putting it on track for its best weekly performance since December.
Tax overhaul
President Donald Trump had offered a plan on Wednesday that calls for lower tax rates for businesses and individuals as part of a comprehensive overhaul of the US tax code. Data in the coming days will provide further evidence on the health of the US economy.
Investors will turn their focus to US economic data, including the personal consumption expenditures (PCE) price index for August later in the day followed by the US jobs data due on October 6.
Traders said the dollar rally may have further legs for now as the technical picture is supportive on the bond markets.
US Treasury yields
At the peak of the Trump fiscal policy reform expectations earlier this year, 10-year US Treasury yields had risen above 2.60 per cent. Despite this month's rise of a quarter percentage point from the September 8 lows, ten-year yields remain at 2.31 per cent.
Elsewhere, the euro nursed losses and is poised for its first monthly decline since February this year as the results of German elections prompted some profit-taking into a double-digit rally in the single currency this year.
The single currency was flat at $1.1791 and has fallen nearly a percent so far this month.
Euro zone inflation data is the key event risk for currency markets with inflation in the 19-country currency bloc expected at 1.6 per cent for September compared with 1.5 per cent in August. The ECB targets inflation at just below 2 per cent.