SYDNEY The U.S. dollar held firm on Thursday, having enjoyed its biggest one-day gain in seven months against a currency basket as commodities and U.S. equities slid on rumours of a hedge fund in trouble .
The dollar also got a lift when minutes of the Federal Reserve's last policy meeting showed some policymakers thought the Fed may have to slow or stop buying bonds before seeing a pickup in employment.
However, the hawkish argument was balanced by a warning from other Fed members about the dangers of ending the bond-buying programme prematurely.
Crucially analysts believe key board members, including Chairman Ben Bernanke and Vice-Chairman Janet Yellen, remain firmly in favour of QE, suggesting the market reaction was over-done.
"We characterize the debate as fairly balanced," analysts at Barclays said in a note. "We maintain our expectation that the Fed will conduct asset purchases through the end of 2013, with some tapering in the pace in the second half of the year."
The dollar had already gained ground before the minutes as rumours that a large commodity hedge fund had been forced to liquidate its holdings unsettled markets, hitting gold in particular. The precious metal slumped 2.5 percent.
Investors used the minutes as a further excuse to cut bearish dollar positions, driving the dollar index up 0.8 percent to its highest level since November 21.
Markets will be combing through a slew of U.S. data later in the day for more signs of a stronger economic recovery. The weekly jobless claims report, a survey on the manufacturing sector and home sales are all up next.
The resurgent dollar saw the euro skid to a one-month low of $1.3271, well off Wednesday's session high of $1.3434. It has broken below initial support at $1.3310, the 38.2 percent retracement of its Nov-Feb rally. The common currency was last flirting with its 55-day moving average at $1.3280.
Dealers are now awaiting flash PMI's on the euro zone due later in the day.
The dollar, however, held steady against the yen at 93.63, having already gained about 8 percent against the Japanese currency so far this year.
The yen has been the worst performing major currency as investors bet on more aggressive policies from the Bank of Japan to reflate the world's third biggest economy.
Sterling took a pasting after minutes of the Bank of England's last meeting showed the governor and two other officials voted to restart buying bonds, suggesting the BOE may be closer than expected to taking more action.
Sterling slumped to its lowest in over two years at $1.5192, before recovering just a bit of ground to $1.5235.
Investors also took aim at the high-flying New Zealand dollar, pushing it more than 1 percent lower to $0.8358. The kiwi was already feeling the heat after comments from the head of the Reserve Bank of New Zealand prompted markets to push out the timing of when the central bank will start raising rates.
Graeme Wheeler said on Wednesday a high kiwi dollar relative to expectations will lead to a lower-than-expected overnight cash rate. He also said the currency was significantly overvalued compared with its economic fundamentals, but admitted there was no quick means to bring it down.
The Australian dollar fell heavily against the greenback as well, losing more than a full U.S. cent to reach a low around $1.0237. A break below $1.0227 will take it back to levels not seen since October.
Australia's central bank governor testifies before parliament on Friday, a twice-a-year event that is usually closely watched by investors.
Recent comments from the Reserve Bank of Australia indicated it had switched to a wait-and-see mode, having already slashed its cash rate by 175 basis points in the past 15 months to a record low of 3.0 percent.
(Editing by Wayne Cole)