FOREX-Dollar steadies after upbeat U.S. consumption data

Sydney/Tokyo (Dec 24)    The U.S. dollar steadied on Tuesday, having given back a bit of its recent hefty gains as upbeat U.S. consumption data fostered hopes of solid U.S. recovery and boosted U.S. bond yields.

Although the market lacked conviction with many investors having already closed their books for the year, traders expect the prospects of eventual rate hike by the Federal Reserve to underpin the dollar.

"Although the Fed's top policymakers seems to feel that recovery in employment is still feeble, the recent strength in the economic data must be reassuring for them," said a trader at a Japanese bank.

The dollar gained 0.2 percent to 104.36 yen, not far off a five-year high of 104.64 touched on Friday, though option-related offers at 105 yen blocked its advance for now.

The euro bought $1.3683, down slightly from late U.S. levels but still holding off a two-week low of $1.3625 plumbed Friday. Against the yen, the common currency stood at 142.79 , not far from a five-year high of 142.90 set last week.

The dollar index gained slightly to stand at 80.530 , edging closer to a two-week high of 80.827 hit last week.

Data on Monday provided some optimism the world's biggest economy is firmly on the recovery path with inflation benign.

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 yield to three-month highs, as investors grew suspicious that the Fed could raise interest rates sooner than it signalled last week.

Althouth 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.

"So far, the conclusion seems to be that the Fed is likely to continue to wind down asset purchases, and this should provide underlying support for the USD," analysts at BNP Paribas wrote in a note to clients.

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 Day and many will stay closed on Thursday.

The Aussie slipped 0.2 percent to $0.8913, though it still kept some distance from last week's three-year low of $0.8820.

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.