The dollar rose against other major currencies on Wednesday after upbeat U.S. economic data helped to send U.S. Treasury yields higher, while the euro fell after credit rating agency Moody's said it may downgrade Spain's debt.
Moody's put Spain's AA1 ratings on review for a possible downgrade, citing concerns about its mounting debt and 2011 funding needs, sending the euro down to test support just below $1.3300.
Robert Ryan, FX strategist at BNP Paribas in Singapore, said the threat of a downgrade was not really a surprise given Spain's 10-year yield spread was about 250 basis points over Bunds. "But this just focuses attention back on Spain," he said.
Ireland's parliament is due to vote on an 85 billion euro ($114 billion) EU/IMF rescue package on Wednesday, which is expected to get through the lower chamber.
The government then hopes to tap the external funding early next year, but the market is not convinced that the euro zone's debt troubles are over.
Chartists said if the euro could hold above support in a band above $1.3280, it could retest $1.3500, its three-week high set on Tuesday. But if that support band gives way, the euro is likely to slip into a $1.3165-1.3500 range before eventually breaking down to test its November low at $1.2969.
The 10-year Treasury yield flew to a seven-month high just above 3.50% in Asian trade on Wednesday, extending a move that started on Tuesday after U.S. retail sales rose for a fifth straight month in November, prompting economists to ratchet up fourth-quarter growth forecasts.
Despite improving growth prospects, the Federal Reserve reaffirmed its commitment to buy $600 billion in bonds, a move that could add fuel to the economic bonfire in coming months.
The rise in yields helped the dollar to bounce on Tuesday to reverse losses on the yen.
Although the 10-year yield retreated to 3.414% later on Wednesday, the dollar remained up near the Y84.00 resistance it has tussled with all month.
"A sharp rise in U.S. Treasury yields is spurring short-covering in the dollar," said Shuichi Kanehira, head of FX spot trading at Mizuho Corporate Bank. "I'm not sure whether this will be a long-term uptrend, but in the short term the dollar could advance further."
U.S. data on Wednesday includes November consumer prices.