August 29, 2013 / 5:09 AM / 4 years ago

Dollar hits 3-week high as U.S. data spurs Fed taper talk

NEW YORK (Reuters) - The dollar rallied to a more than three-week high against a basket of major currencies on Thursday after strong U.S. data emboldened the view that the Federal Reserve could begin winding down its stimulus program next month.

The Commerce Department reported the U.S. economy grew at a 2.5 percent annual rate in the April-June period, more than double the pace clocked in the prior three months, thanks to a surge in exports.

“This is a good report for those who expect the Fed to taper in September,” said Vassili Serebriakov, currency strategist at BNP Paribas in New York.

“One of the key concerns that the Fed has voiced recently has been the dichotomy between firm employment and soft GDP growth. This should ease some of those concerns,” he said.

Still, Serebriakov doubted that the data would sway some market participants who believe the Fed will not begin to scale back its stimulus until later.

BNP Paribas, for one, has long held the view that the Fed will start winding down its asset purchases in December, noting that the U.S. economy is not yet at the point that would justify a tapering, he added.

Also on Thursday, the government reported the number of Americans filing new claims for jobless benefits fell last week, a potential sign of faster hiring in August.

Should the U.S. nonfarm payrolls report for August, which is due out on September 6, show strong gains, it will cement expectations the Fed will scale back its asset-buying plan at its next policy meeting next month.

The dollar was last 0.7 percent higher against a basket of six major currencies at 81.958, after earlier rising as high as 82.067, its highest level since August 5.

Against the safe-haven Japanese yen, the greenback traded up 0.7 percent at 98.28 yen.

A picture illustration shows Japanese 10,000 yen notes featuring a portrait of Yukichi Fukuzawa, the founding father of modern Japan, taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao

“Geopolitical jitters abated, but are likely to remain at elevated levels for the foreseeable future,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, D.C.

“As a result, investors would likely head into the long U.S. holiday weekend favouring the greenback,” he said. “Investors remain in wait-and-see mode and were likely to tread cautiously ahead of next week’s U.S. jobs report.”

Worries over Syria have continued to cast a shadow on investor confidence, but expectations of imminent turmoil eased as the diplomatic process was seen playing out into next week, and the White House emphasized that any action would be “very discrete and limited,” and in no way comparable to the Iraq war

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Data on Friday on U.S. consumer spending and sentiment and Midwest manufacturing could boost the dollar.

“Outcomes that build on today’s optimism would lend more durable support to the dollar,” Manimbo said.

Some said reduced tension in emerging markets also supported the U.S. currency as it reinforced bets the Fed would crimp monetary stimulus soon.

Emerging markets, the first to be hit by outflows of funds as investors braced for an eventual end to the Fed’s monetary stimulus, have experienced more turbulence as the Syria crisis makes investors more risk-averse.

While a debt auction in Italy was relatively successful, borrowing costs for a new five-year bond rose as investors remained wary about the coalition government’s stability, which weighed on the euro.

Meanwhile, the euro’s recent resilience is likely running out of steam, according to the options market.

The euro plunged 0.8 percent against the dollar to $1.3234, on pace for its worst daily performance since mid-April. It earlier touched a two-week trough of $1.3218, according to Reuters data.

Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Leslie Adler

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