The U.S. dollar hit a three-month high versus a basket of currencies this week as the Federal Reserve showed much confidence in American economic outlook and investors worried about the fiscal health of eurozone nations.
Technical factors linked to short-covering at year-end also contributed to the rise of the greenback.
The dollar index, a measurement of dollar's strength against major currencies, ended the week at 77,771, the highest since early September.
The dollar has surged across the board over the past two weeks and a correlation between weak dollar and positive economic news seems to be
fading. But some analysts said it was too early to hail the recovery of the U.S. currency as the Fed was not likely to raise interest rates before the third quarter of 2010.
Leading economist Nouriel Roubini said Thursday that the dollar would eventually recover some of its losses, but only in "six to 12 months from now, not any time soon."
A day earlier, the Fed decided to maintain the target range for the federal funds rate at 0 to 0.25 percent, which echoed previous market
expectations.
The American central bank said in a statement after a monetary policy meeting that economic conditions were likely to warrant exceptionally low levels of the federal funds rate for an "extended period."
The Fed gave no signals about lifting interest rates any time soon. But it mentioned improvements in the economy, and announced plans about exiting from some extraordinary stimulus measures.
U.S. economic activity has continued to pick up and the deterioration in the labor market is abating, the statement said.
Although economic activity is likely to remain weak for a time, the Fed anticipated the policy actions, stimulus, and market forces to contribute to a strengthening economic growth and a gradual return to higher levels of employment.
The Fed said that most of its special liquidity facilities would expire on Feb. 1, 2010, consistent with its previous announcement. It will be working with other central banks to close its temporary liquidity swap arrangements by Feb. 1, it added.
The Fed also expected that the amounts provided to depository institutions under the Term Auction Facility would be scaled back further in early 2010.
Economic data released during the week added to optimism about the U.S. outlook.
The Labor Department said Tuesday that U.S. producer prices index jumped by 1.8 percent in November as gasoline and fuels prices spiked,
better than analysts' forecast of 0.8 percent. Core producer prices, which exclude energy and food costs, rose 0.5 percent, the largest increase in more than a year.
According to the department, the consumer price index rose 0.4 percent month-to-month in November as expected. The gain was led by higher energy prices, which increased 4.1 percent during the month. Core prices remained flat in November compared with October, suggesting a weak inflation pressures in the country.
U.S. industrial production saw a broad-based surge of 0.8 percent in November, with better performance in manufacture, construction, materials and mining.
International capital inflows into U.S. securities remained strong in October, with net foreign purchases of long-term assets of 20.7 billion dollars, the Treasury said.
New housing starts and permits were also on a rise which further spurred the U.S. market.
While in Europe, Standard and Poor's downgraded Greece's long-term credit rating to BBB+ from A- on Wednesday. It was the first time in 10 years a leading ratings agency has given Greece a rating of below A grade.
"The downgrade reflects our opinion that the measures the Greek authorities have recently announced to reduce the high fiscal deficit are
unlikely, on their own, to lead to a sustainable reduction in the public debt burden," the rating agency said.
Last week another major rating agency, Fitch Ratings also cast a same decision on Greece with a negative outlook.
Standard and Poor's revised its rating methodology for covered-bond programs on Wednesday. It placed 1,460 billion euros (about 2,154 billion U.S. dollars) worth of debt linked to 98 (mainly European) covered-bond programs on Credit Watch for a possible downgrade.
The move dragged the euro lower since covered 04bonds are often used by European banks as a low-cost fund raising instrument. The euro fell below 1.43 dollars, the lowest in three months, in a Friday session before recovering some losses.
Other major currencies including the British pound, the Canadian dollar, and the Swiss francs and the Japanese yen also registered a loss
against the U.S. dollar.