NEW YORK (Reuters) - The dollar slipped from a seven-month high against a basket of currencies on Thursday as investors opted to take a pause after its recent sharp and swift rally even as U.S. economic data continued to show signs of strength.
While the dollar fell from a three-month peak against the euro, analysts say the outlook for the U.S. currency remains bright on expectations the U.S. economy is outperforming its major counterparts.
Indeed, the number of Americans filing new claims for unemployment benefits dropped for a third straight week last week, the latest indication the labor market recovery was gaining traction.
Other reports over the past week highlighted improvement in the U.S. labor market and consumer spending. The state of the jobs market is key to U.S. Federal Reserve policy. Should this sector continue to show marked strength the Fed may reconsider its bond buying program, called quantitative easing.
The Fed's bond buying is tantamount to printing money and therefore dilutes the dollar's value.
Dismal data out of the euro zone, meanwhile, should sustain the European Central Bank's dovish side. The ECB is likely to keep monetary policy accommodative or perhaps lower interest rates in the months ahead.
Contrasting with a positive U.S. growth outlook, euro zone employment fell 0.3 percent in the last three months of 2012, data showed on Thursday, intensifying concerns about the region's economic outlook. Data on Wednesday showed a bigger-than-expected drop in euro zone factory output in January. The euro last traded at $1.3004, up 0.3 percent on the day, rebounding from a session low of $1.2910, the weakest since December 10. Support lies around $1.2876, the 50 percent retracement of the euro's rise from July to February.
The foreign exchange markets are now under the influence of a trilogy of themes: the American economic revival, diverging monetary policy expectations and the unfinished euro area crisis, according to Sebastien Galy, currency strategist at Societe Generale in New York.
"Those themes all point in the same direction: a stronger dollar," he said.
Nevertheless, the dollar index, which measures the value of the greenback versus a basket of currencies, fell 0.4 percent to 82.578 <.DXY>. It had earlier risen as high as 83.166 on Reuters data, the highest since August 3.
"Dollar strength is now far less dependent on risk conditions; the U.S. economic outperformance and the fears of a not-too-distant Fed exit imply that the dollar is no longer a funding currency of choice in the carry trade. The exit debate will heat up in the second half," Galy said.
"For now, we fear that another euro area shockwave will hit the euro, as dysfunctional politics and procrastination over reform resurface," he said.
Political uncertainty in Italy and a likely bailout for Cyprus should keep the euro under pressure.
Investors also focused on a EU summit that will discuss budget policies, with signs that France, Spain and Portugal could be given more time to meet their deficit goals as long as they maintain a debt-cutting trend.
The two-day summit will give EU leaders a chance to discuss budget policies, with signs that France, Spain and Portugal could be given more time to meet their deficit goals as long as they maintain a debt-cutting trend.
DOLLAR STEADY VERSUS YEN
The dollar last traded at 96.08 yen, flat on the day, but expectations of aggressive policy easing from the Bank of Japan are expected to underpin the dollar, with many traders looking for a retest of the 3-1/2-year high of 96.71 yen hit on Tuesday.
The euro rose 0.3 percent to 124.98 yen, still some way from the 34-month peak around 127.70 set last month.
Meanwhile, the dollar rose to a six-month peak against the Swiss franc and the Norwegian crown after central bank policy decisions and accompanying comments in Switzerland and Norway pushed those currencies lower.
"CHF is now the enigma currency of non choice - very few want to have anything to do with it," said Dean Popplewell, chief currency strategist at OANDA in Toronto.
"The risk reward in other G10 currencies look more attractive that a SNB backstopped supported currency," he said.
(Additional reporting by Wanfeng Zhou; Editing by Diane Craft)
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