LONDON - The dollar gained slightly versus the euro on Tuesday as U.S. consumption data fostered hopes of a solid recovery in the world's largest economy and reinforced convictions the Federal Reserve will continue to tighten monetary policy.
Consumer spending rose in November at the fastest pace since June, while a survey showed consumer sentiment hit a five-month high heading into the end of the year.
The data helped to push medium-term U.S. notes yields to three-month highs, investors suspecting that the Fed could raise interest rates sooner than it signalled last week.
"The U.S. data was robust enough to keep the dollar supported to year end, and to convince investors that the Federal Reserve will continue to taper," said Michael Sneyd, FX strategist at BNP Paribas.
He was referring to the Federal Reserve's scaling back its monthly asset purchases in its quantitative easing programme.
The euro was down 0.1 percent at $1.3682 by 1211 GMT. Against the yen, the common currency stood at 142.65, not far from a five-year high of 142.90 set last week.
The dollar gained 0.2 percent to 104.27 yen, not far off a five-year high of 104.64 touched on Friday. The dollar index gained slightly to 80.500, edging closer to a two-week high of 80.827 hit last week.
The data on Monday provided some optimism the U.S. economy is firmly on the recovery path with inflation benign.
Although the Fed has gone to a great length to tell markets that tapering of its bond buying does not automatically lead to rate hikes, that has not stopped investors from speculating on the Fed's eventual exit from zero interest rates.
Markets are also now looking to see if the U.S. economy will be strong enough to allow the Fed to continue withdrawing support through 2014.
Still, in the very near-term, the market is likely to struggle to find fresh stimulus ahead of year-end holidays.
Most financial markets across the globe will be shut on Wednesday for Christmas and many will stay closed on Thursday.
Worries about a cash crunch in China appeared to have taken a back seat after the central bank last week injected 300 billion yuan ($49.41 billion) into the money market.
Traders, however, will no doubt be keeping a close eye on any fresh developments there in the year-end lull.