3 Min Read
* Dollar back in favour after volatile night
* Easing emerging market stress helps Aussie dollar bounce
* U.S. economy grew at 3.2 pct annualised rate in Q4
* Downside surprise for soft EZ inflation rises after German data
By Ian Chua
SYDNEY, Jan 31 (Reuters) - The U.S. dollar traded at one-week highs against a basket of major currencies early on Friday, having been swept higher as investors took aim at the euro in a volatile end to a very choppy month.
The dollar index rose as far as 81.135 from Thursday's low of 80.545, on track to end the week up 0.7 percent. It was up 1.3 percent so far this month.
U.S. dollar bulls welcomed data on Thursday showing the world's biggest economy grew at a solid 3.2 percent annualised rate in the fourth quarter.
Traders said that was enough to support the view that the Federal Reserve can continue to wind down its stimulus program.
All 70 economists in the latest Reuters poll expect the Fed to maintain the pace of the taper and reduce by $10 billion at each of the seven remaining FOMC meetings this year.
Against the yen, the dollar drifted back up to 102.78 , reversing some of Wednesday's 0.7 percent fall. Volumes were light with large parts of Asia on holiday.
The euro, meanwhile, skidded to a one-week low of $1.3543 and also lost ground on the Japanese currency, touching an eight-week trough of 138.90.
Soft German inflation data ahead of a euro zone reading later on Friday, kept alive market speculation the European Central Bank could come under more pressure to act to stave off the risk of deflation.
The ECB holds its policy review next week.
"The single currency may weaken further in February should the European Central Bank show a greater willingness to further embark on its easing cycle," said David Song, analyst at DailyFX.
Investors also bought back some beaten-down commodity currencies as stress in emerging markets eased off a little.
The Australian dollar was one such beneficiary, bouncing back towards 88 U.S. cents as it pulled away from a 3-1/2 year low of $0.8660 plumbed a week ago.
It's New Zealand peer, however, enjoyed no reprieve with kiwi bulls still smarting after the Reserve Bank of New Zealand kept interest rates unchanged at a record low 2.5 percent on Thursday.
The New Zealand dollar traded at $0.8167, having plumbed a one-month low of $0.8127.
In an eye-catching move, the Aussie jumped more than 1 percent against its Antipodean counterpart, dealing a severe blow to the kiwi's bull run.
The Aussie was last at NZ$1.0750, near a three-week peak of NZ$1.0793 set overnight. It was still down 0.8 percent this year, following a 13-percent slide in 2013.