The dollar hit a six-month high on a trade-weighted basis on Monday consolidating sharp gains after US growth figures came in stronger than expected last week.
On Friday, figures showed the US economy grew almost a full percentage point above forecasts in the fourth quarter.
The figures helped give the dollar an additional boost given that the US currency was already benefiting from increased risk aversion. Haven demand for the dollar was boosted as fears over Greece’s fiscal position and concerns over continued Chinese monetary tightening weighed on risk appetite and global equity markets.
Michael Hart at Citigroup said the dollar’s reaction to the US growth data was indicative of a change in trading pattern for the currency.
“[It has moved] out of a crisis-type mode that linked the dollar’s fate to successive waves of risk aversion and equity market performance, and into a pattern that more closely reflects improving underlying fundamentals,” he said.
The dollar index, which tracks its progress against a basket of six major currencies, rose to a high of 79.313, it highest level since July 30.
The dollar also rose to a fresh six-month peak of $1.3850 against the euro, before paring some gains to stand down 0.3 per cent at $1.3901, climbed 0.1 per cent to Y90.30 against the yen and gained 0.9 per cent to $1.5860 against the pound.
The pound also lost ground elsewhere, dropping 1.1 per cent to £0.8760 against the euro and losing 0.8 per cent to Y143.18 against the yen as political concerns and the prospect of the Bank of England’s policy meeting later in the week weighed on sterling.
Two UK opinion polls over the weekend showed a general election, which has to held by June, would result in a hung parliament. This weighed on sterling since many believe that such a result would lessen the likelihood of the UK getting to grips with its rising budget deficit.
Meanwhile, traders were wary ahead of the result of the Bank of England’s monetary policy committee meeting on Thursday.
Adarsh Sinha at Barclays Capital believed the Bank was likely to rein in its policy of quantitative easing and signal a pause in its asset purchase programme.
“The risk is if QE is extended, which would lead to a sharp sell-off in sterling and as such, risk-reward does not favour being long ahead of the decision,” he said.
Trade weighted sterling, a measure of the pound against a basket of other major currencies, fell 0.7 per cent to 80.7.
