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NEW YORK (Reuters) - The U.S. dollar recovered to trade higher against the euro and yen late Thursday afternoon in a volatile session that saw the U.S. currency swing between gains and losses.
The move higher came after John Williams, president of the Federal Reserve Bank of San Francisco, said the U.S. Federal Reserve could begin easing up on the monetary gas pedal this summer and end its bond buys late this year. <OD:nN9E8KD02P>.
His remarks offset the negative sentiment earlier in the global day from a deluge of U.S. data that highlighted vulnerabilities in the world's largest economy and curbed expectations that the Federal Reserve will scale back its bond-buying program any time soon.
"Williams' remarks are taken as meaning less stimulus, which is good for the dollar, but not good for stocks or the euro," said Kathy Lien, managing director at BK Asset Management in New York.
The euro slipped 0.1 percent to $1.2876, but above the six-week low of $1.2842 touched on Wednesday, when data showed the euro zone's economy contracted for a sixth consecutive quarter.
The dollar rose 0.1 percent against the yen to 102.31 yen. On Wednesday, the dollar touched a peak of 102.76 yen, its strongest since late 2008, according to Reuters data.
"It will take further gains to convince me that the 'substantial improvement' test for ending our asset purchases has been met," John Williams, president of the Federal Reserve Bank of San Francisco, said in remarks prepared for delivery to a luncheon sponsored by the Portland Business Journal.
But assuming that the labor market, which Williams called "considerably" improved, continues to strengthen, he added:
"We could reduce somewhat the pace of our securities purchases, perhaps as early as this summer. Then, if all goes as hoped, we could end the purchase program sometime late this year."
Earlier, the dollar was hurt by data showing the number of Americans filing new claims for unemployment benefits climbed last week to the fastest pace in six months, raising concerns about government austerity measures.
The Fed has made it clear that monetary policy will remain accommodative until they see broad and sustained growth in jobs, but the dollar did recover against the yen and pare losses against the euro.
Other data showed a sharp drop in gasoline costs led U.S. consumer prices to tumble in April by the most in more than four years. Meanwhile, groundbreaking for new U.S. homes - also known as housing starts - fell more than expected in April from an almost five-year high.
"The dollar was on an uptrend headed into today's number, mostly due to an optimistic view of the U.S. economy," said Vassili Serebriakov, FX strategist at BNP Paribas in New York.
"The Fed has fallen short of its mandate on jobs and inflation, so the data highlights the need for further accommodation," he said. "The data also warrants a reconsideration of the bullish dollar view."
Dollar losses accelerated in mid-morning in North American trade after a survey showed factory activity in the U.S. mid-Atlantic region contracted in May as new orders fell to their lowest level in almost a year.
Dallas Federal Reserve Bank President Richard Fisher said a slowdown in U.S. inflation was benign and could "unleash" consumer spending, Fisher said, adding that he was not worried about the risk of deflation.
"The data today was broadly weak and overall, it drives home the fact that the economic backdrop remains uneven, and that will keep the Fed's foot on the accelerator by continuing to engage in accommodative policy," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.
"Talk about the Fed scaling back its asset purchases is premature, but we do expect it to happen sometime at the turn of the year," he said.
Meanwhile, falling prices in Germany and France highlighted the risk of deflation in the euro zone, which slipped into its longest-ever recession at the start of this year, increasing the risk of more European Central Bank interest-rate cuts.
Traders said investors were eager to buy dips in the dollar, which was expected to gain further, while the yen continued to weaken following April's aggressive Japanese monetary easing.
Reporting By Nick Olivari and Julie Haviv; Editing by Jan Paschal