The U.S. dollar ended 2014 with a gain of nearly 13 percent against a basket of major currencies on Wednesday, its strongest year since 1997 and, according to most major banks, just a prelude to a further rise next year.
Traders favored the dollar as this year's winning bet heading into the New Year and pushed the euro to a fresh 29-month low against the greenback of $1.2098, just below a closely watched $1.21 technical level. The dollar also hit a new 29-month high against the Swiss franc of 0.9944 franc in thin trade.
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The dollar index, which measures the greenback's value against a basket of six major currencies, was last up 0.33 percent at 90.288. The index posted its largest annual gain since it climbed just over 13 percent in 1997.
"The winning trade has been in the dollar, and traders are closing the year holding on to their strong dollar positions," said Chris Gaffney, senior market strategist at EverBank Wealth Management in St. Louis.
The contrast between the U.S. Federal Reserve's path towards raising interest rates next year and looser monetary policies in the euro zone and Japan was the driving force behind the dollar index's rise to its highest in more than 8-1/2 years on Tuesday.
However, it is not clear whether further gains in the first half of next year might put the Fed off raising rates. Also, turbulence may grow in developing markets, especially China. Political turmoil could again threaten Greece's presence in the euro, adding to concern over the global financial system.
"I think certainly volatility is likely to go up," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. He said the upward trend in the dollar would likely continue, however.
The euro was last down 0.48 percent against the dollar at $1.2098. The dollar was last up 0.52 percent against the franc at 0.9939 franc. The dollar was last up 0.28 percent against the yen at 119.79 yen.
Sterling was an exception and was last up 0.17 percent against the dollar at $1.5585.
On Wall Street, major indexes were on track to close out 2014 just off record levels, with the benchmark S&P 500 stock index last down 0.86 percent. (Reporting by Sam Forgione; Additional reporting by Jemima Kelly and Patrick Graham in London; Editing by Peter Galloway and Meredith Mazzilli)