The U.S. dollar rose after new data showed the country's economy grew at its fastest pace in nearly two years in Q3, despite interest rates hitting a 22-year high.
On Thursday, a near three-week high of 106.89 earlier in the forex trading session. Later in the evening, the index retreated to 106.57.
The Bureau of Economic Analysis at the Commerce Department reported that gross domestic product (GDP) increased at a 4.9 percent annualized rate in Q3 after adjusting for inflation and seasonal swings.
This is the fastest surge since Q4 last year. It surpasses economists' 4.3 percent forecast and the second quarter's 2.1 percent growth pace.
"It is reinforcing the message that the U.S. is sort of hanging in there on the economic side, and inflation is also remaining somewhat stubborn," said Brad Bechtel, global head of FX at Jefferies. "At the margin, that helps the dollar."
Inventory investment increased by $80.6 billion in Q3, contributing 1.32 percentage points to GDP growth. Excluding inventories and trade, the economy grew at a robust 3.5 percent rate.
Consumer spending, which makes up over two-thirds of the economy, is the main driving point. It grew at a 4.0 percent rate, contributing 2.69 percentage points to GDP growth.
The GDP figure followed robust business activity data earlier this week that highlighted the U.S. economy's strength.
Despite the Federal Reserve's efforts to curb spending through higher interest rates, a robust job market allowed consumers to request higher wages. This led to increased expenditures on goods and services, including concerts, movies and vacations during the summer.
Other parts of the economy are also showing resilience. Residential fixed investment, which reflects the housing market's health, increased at an annualized rate of 3.9 percent in the third quarter. It is the first time this component has contributed to growth in more than two years.
However, real incomes or the money households spend after taxes, fell at a 1.0 percent pace in the third quarter, as higher taxes partially offset wage gains. This led consumers to dip into their savings to finance some of their spending. The personal saving rate fell to 3.8 percent from 5.2 percent in the second quarter.
Potential slowdown
U.S. Treasury Secretary Janet Yellen said growth would likely slow in the coming months.
"It's a good, strong number, and it shows an economy that's doing very well," said Yellen in a discussion with Bloomberg TV in Washington. "Let's remember that it is just one quarter's number and I'm not expecting growth at that pace to continue."
A declining saving rate and the resumption of student loan repayments in October, which economists estimate will cost borrowers roughly $70 billion or 0.3 percent of disposable personal income, could dampen consumer spending.
Low-income consumers are also increasingly turning to debt to finance purchases, with higher borrowing costs leading to increased credit card delinquencies.
Federal Reserve Chair Jerome Powell mentioned that the central bank needs to see "below-trend growth" to be confident that inflation will return to the Fed's two percent target, as high demand could put upward pressure on prices.
The Fed may still raise interest rates again in December, but its primary strategy for combating inflation is now to keep rates high for a longer period.
Powell said high Treasury yields are currently helping to slow the economy. The 10-year Treasury yield neared a key five percent threshold on Thursday morning before falling to 4.89 percent in the afternoon as investors processed the latest GDP data.