NEW YORK (Reuters) - The dollar advanced to a two-week high against major currencies on Thursday and looked likely to extend gains after the Federal Reserve signaled it would begin withdrawing its stimulus programs this year as the U.S. economy improves.
Stronger-than-expected data on factory activity in the U.S. mid-Atlantic region and on home resales added to the dollar's momentum, overshadowing another report showing a rise in weekly jobless claims.
Investors re-established bullish bets on the dollar after Fed Chairman Ben Bernanke, following the central bank's two-day policy meeting that concluded on Wednesday, said the Fed was likely to end its bond-buying program, known as quantitative easing, by mid-2014.
"The prospect of less QE (and) higher interest rates is something that should help the dollar, particularly in an environment where some other central banks are still moving in the other direction," said Robert Lynch, senior currency strategist at HSBC in New York.
Benchmark U.S. Treasury yields rose to their highest in almost two years after Bernanke's remarks. Traders of short-term U.S. interest rate futures expect the Fed to begin lifting its target for short-term borrowing costs in late 2014.
In contrast to the Fed's stance, the Bank of Japan recently unveiled aggressive easing measures to fight deflation and pledged to do more if needed. Pressure is also growing on the European Central Bank to take steps to stem deterioration in the euro zone's economy.
Higher interest rates tend to favor a currency as investors seek yield.
The dollar index, which measures dollar performance against a basket of currencies, hit a two-week peak of 82.145 .DXY, the strongest since June 6. It was last up 0.5 percent.
Analysts said the dollar could face volatile moves in the coming weeks as investors use every piece of economic data to try to gauge the health of the economy. The Fed painted an upbeat view of the economy on Wednesday, saying downside risks to growth have receded.
"Volatility is going to be the name of the game. We're going to see some big ugly moves," said Ronald Simpson, managing director of global currency analysis at Action Economics in Tampa, Florida.
The dollar's resurgence could put an end to the recent resilience of the euro, potentially pushing it below $1.30 as markets become wary about the prospect of lower ECB interest rates.
The euro fell 0.6 percent to $1.3220, with sentiment hurt by surveys showing the euro zone private sector has yet to make a steady recovery. [ID:nL9N0CP04L] It fell as low as $1.3161, a two-week low.
Supports are reported at the 100-day simple moving average at $1.3094 and the 200-day SMA at $1.3072. Some $5.4 billion in euros changed hands on Reuters Dealing on Thursday.
"The U.S. growth story is still the most convincing in the G4. $1.30 could be on the cards for euro/dollar heading into the ECB meeting on July 4," said Valentin Marinov, currency strategist at Citigroup in London. G4 refers to the economies of the United States, euro zone, Japan and Britain.
Analysts at Westpac said they added a short euro position to their portfolio and would add more on any rebound to $1.3350.
The dollar rose 1 percent to 97.43 yen, having hit 98.28 yen, according to Reuters data, its strongest in more than a week. Some analysts forecast a rise back above 100 yen due to the contrast between the U.S. monetary policy outlook and aggressive easing in Japan. Some $3.9 billion in yen changed hands on Reuters Dealing on Thursday
The dollar broke away from the pattern over recent weeks in which it often fell against the yen in tandem with share prices. U.S. shares fell more than 1 percent .SPX, while Japan's Nikkei .N225 ended down 1.7 percent.
The Australian dollar hit a 33-month low against the dollar, tracking steep falls in riskier and emerging currencies and after data showed China's manufacturing sector weakened in June to a nine-month low.
It hit a low of $0.9160 and was last down 1.1 percent at $0.9186. The New Zealand dollar lost 1.8 percent to $0.7748.
(Reporting by Nick Olivari and Wanfeng Zhou; Editing by Dan Grebler)
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