By Hideyuki Sano
TOKYO (Reuters) - The dollar held firm on Thursday, drawing support after the Federal Reserve's new chief Jerome Powell struck an optimistic tone on the U.S. economy in a boost to rate hawks that sent global stocks tumbling.
In contrast, benign inflation data in the euro zone dented expectations that the European Central Bank will dial back its stimulus, slamming the euro to five-week lows against the dollar and a six-month nadir against the yen.
The dollar index rose to a five-week high of 90.746, as Powell's optimism on the U.S. economy suggested the Fed is going to raise interest rates four times this year, one more than what markets had expected.
On the other hand, ECB president Mario Draghi said on Monday slack in the euro zone economy may be bigger than previously estimated.
"Powell was more hawkish than anticipated. In addition, Draghi wasn't that aggressive when he spoke earlier this week, so there is a clear contrast," said Bart Wakabayashi, Tokyo Branch Manager at State Street.
The euro dropped to $1.21835 (EUR=EBS), its lowest since Jan. 18. Against the yen, the single currency fell to 129.86 yen (EURJPY=), its weakest since early September and down 5.6 percent from its 2-1/2-year high hit just a month ago.
Euro zone inflation slowed to a 14-month low in February, data showed on Wednesday, underscoring why the ECB remains cautious about removing stimulus despite growth exceeding expectations.
Inflation in the 19 countries sharing the euro slowed to 1.2 percent from 1.3 percent in January, in line with expectations but far from the ECB's long elusive target of almost 2 percent.
"Markets are pricing in the chance that the ECB will raise interest rates as early as by the end of this year, so a return of a scenario of another extension in its bond buying and pushing back a rate hike into 2019 could put pressure on the euro," Makoto Noji, senior strategist at Nikko SMBC said in report.
The euro was also hurt by political uncertainties as Italians are preparing to vote in a national election on Sunday, while the leading political parties in Germany decide on a coalition deal that would secure Angela Merkel a fourth term as chancellor.
The British pound was pressured by renewed worries over Brexit after British Prime Minister Theresa May said the EU's draft legal text published on Wednesday would undermine Britain and threaten its constitutional integrity.
The pound fell to $1.3743 <GBP=D4>, its lowest level since mid-January. The euro firmed to 0.88625 pound (EURGBP=D4), having risen almost 1 percent from this week's low of 0.8772 touched on Monday.
Still, some say the dollar could falter again given that any support for the currency from higher interest rates - the main driver of its gains until early 2017 - has been tenuous.
In fact, the dollar index fell almost 10 percent last year, the biggest fall in more than a decade even though no other major central banks raised interest rates other than the Fed, which not only hiked rates three times but also started trimming down its balance sheet.
The dollar index is still down 1.5 percent this year, dogged by suspicions that the Trump Administration prefers a weaker dollar to mend its bulging trade deficit, and worries its big tax cuts and spending plans may boost fiscal deficits to an extent that they undermine confidence in U.S. debt.
The yen eased about 0.1 percent in Asia on Thursday to 106.80 per dollar <JPY=>, still maintaining slim gains for the week.
On top of safety bids stemming from wobbly share prices, the yen also got a boost from the previous day's Bank of Japan bond-buying operations, where the central bank trimmed the amount of its buying in super-long Japanese government bonds.
Repatriation of funds by corporates ahead of Japan's financial year-end on March 31 also rendered additional help.
The Australian dollar hit a two-month trough versus the dollar and a nine-month low versus the yen after data on Australian business investment showed a 0.2 percent dip for the December quarter, missing forecasts for a 0.9 percent increase.
The Australian dollar traded 0.5 percent down at $0.7726, having briefly fallen to as low as $0.7717 <AUD=D4>.
"The Aussie looked bearish after it had fallen below its 200-day moving average and the weak data triggered renewed weakness," State Street's Wakabayashi said.
"With Australian bond yields no longer higher than U.S. bonds, it no longer has the attraction it used to have for a long time. I'm quite bearish on the currency," he added.
The U.S. 10-year yield (US10YT=RR) surpassed the 10-year Australian bond yield (AU10YT=RR) late last month.