Dollar dips but longer-term rally still seen in play

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[December 22, 2016]  By Jemima Kelly

LONDON (Reuters) - The dollar dipped for a second day on Thursday as traders booked profits ahead of a batch of U.S. data later in the day, though the greenback was still trading less than a percent away from a 14-year high touched earlier in the week.

A woman counts U.S. dollars at a money changer in Yangon May 23, 2013. REUTERS/Soe Zeya Tun

The U.S. currency has surged since last week, when the U.S. Federal Reserve hinted that interest rates would be increased three times in 2017 after its first rate hike in a year, with the dollar index - which measures the greenback against six major peers - hitting its highest since December 2002 <.DXY>.

It had already been climbing in the wake of Donald Trump's victory in the U.S. presidential elections six weeks ago, up 5 percent since then, with investors betting the president-elect's planned tax cuts and increased spending in areas like infrastructure will boost growth and inflation, leading to higher interest rates.

The dollar dipped 0.1 percent on Thursday, having also fallen around a quarter of a percent on Wednesday. But analysts said this week's moves must be viewed in the context of thin liquidity, and there was no clear evidence to suggest the dollar's rally had run out of steam.

"It think we’re pausing – I think the story about U.S. rates has got further to run at the start of next year, when Trump presents his wish-list on the budget," said ING currency strategist Chris Turner, in London.

"We see U.S. 10-year yields pushing up to 2.75 percent in Q1, so we think there’s a bit more dollar strength to come."

U.S. 10-year Treasury yields have climbed 70 basis points since Trump's election to as high as 2.6 percent, driving the dollar higher.

While trade is expected to slow further ahead of Christmas on Sunday, the market's near-term focus is on U.S. economic indicators due on Thursday, including revised GDP for July to September, durable goods orders for November, and weekly initial jobless claims. <ECONUS>

The euro was up 0.2 percent at $1.0448 <EUR=EBS>, rebounding from $1.0352 on Tuesday, the lowest since January 2003. Some analysts linked its modest rise to plans to rescue Montei dei Paschi di Siena, Italy's second-biggest bank.

Others, though, said the single currency's movements were more related to temporary weakness in the dollar.

"What we might be seeing is when you’ve had such a strong run, like we’ve seen in the dollar, and you go into a period where liquidity is thin ... people take profit and close out some positions," said HSBC currency strategist Dominic Bunning, in London.

(Additional reporting by Yuzuha Oka in Tokyo; Editing by Alison Williams and Toby Chopra)

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