The dollar spiked to a three-month high against the euro Thursday as markets brushed off U.S. reports pointing to a gradual recovery and focused instead on the unwinding of the U.S. Federal Reserve's emergency support measures.
The 16-nation euro dropped to $1.4305, its lowest level since Sept. 7. In late afternoon trading, the euro bought $1.4349, compared with $1.4516 late Wednesday.
Meanwhile, the British pound slipped to $1.6156 from $1.6310 the night before, while the dollar rose slightly to 89.96 Japanese yen from 89.90 in New York.
Though the Fed reiterated Wednesday its pledge to keep interest rates near zero, it noted improvements in the economy and detailed the beginnings of a plan to dismantle a number of its extraordinary lending measures in 2010.
The news stoked speculation the central bank might increase interest rates sooner than expected, leading many investors to shift back into the dollar.
"The trigger for the dollar rebound is the Fed confirming that many of its liquidity providing measures will be unwound early next year," said Hans Redeker, global head of foreign exchange strategy at BNP Paribas.
The dollar has enjoyed a strong rally in December, partly because of mounting confidence about the outlook for the U.S. economy following a string of better than expected economic data, but also because of growing worries about the creditworthiness of some of the countries on the periphery of the 16-country eurozone.
A pair of improved economic reports Thursday did little to encourage risk-taking in markets. The Conference Board's index of leading economic indicators rose in November for the eighth consecutive month, while the Philadelphia Federal Reserve said manufacturing in its region rose.
Also this week, Standard & Poor's downgraded its credit rating on Greece, arguing that the government's new economic plan was unlikely to lead to a "sustainable" reduction in the country's debts.
"While there are no realistic expectations that the deficit issues facing Greece _ and Ireland, Spain and Portugal _ will lead to a breakdown of European Monetary Union, the problems do highlight that an inflexible and strong exchange rate can be a burden in times of stress," said Jane Foley, research director at Forex.com.
Also affecting trading at the moment is the looming year-end _ many traders are looking to lock in gains on the euro's rise earlier in the year.
In other late trading Thursday, the dollar rose to 1.0702 Canadian dollars from 1.0630 late Wednesday, and climbed to 1.0466 Swiss francs from 1.0397 francs.