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NEW YORK (Reuters) - Investors trimmed dollar positions during the Christmas holiday lull on Wednesday, pulling the greenback down from its highest point in nearly nine years after strong U.S. economic growth data on Tuesday solidified views of coming Fed rate increases.
The dollar retreated by 0.13 percent to 89.943 against a basket of currencies .DXY after Tuesday's data showed U.S. third-quarter gross domestic product grew at an annualized 5.0 percent rate.
The dollar index .DXY reached a high not seen since March 2006, while the two-year yield on U.S. Treasuries US2YT=RR jumped to an almost four-year high of 0.747 percent, giving the greenback a distinct advantage over its counterparts.
"I think we can be quite comfortable in the stronger dollar view going into year-end following yesterday's strong GDP data," said Michael Sneyd, a currency strategist at BNP Paribas in London.
The dollar index is up 12.3 percent this year, on track for its best annual performance in nearly a decade, though the rally only took off in the second half of 2014.
There was little reaction to better than expected U.S. weekly jobless claims data.
A steady stream of strong U.S. data is an incentive for investors to purchase dollar-based assets to the detriment of the euro or yen where loosening of monetary policy in a bid to stimulate growth is in the works.
The euro rose 0.20 percent but was still anchored near a 28-month low of $1.2164 EUR= hit after the U.S. GDP data, according to Thomson Reuters data. It last traded at $1.2195.
"We still have the euro/dollar around $1.22 and looking quite heavy. A break below this level where there are strong bands of support opens up a move down to the $1.12 area," said Shaun Osborne, chief foreign exchange strategist at TD Securities in Toronto.
"For that we need to see U.S. yields continue to rise and strong data. This will keep the markets on alert for Fed rate liftoff. We'll be on tenterhooks after the end of the first quarter," he said.
Commodity currencies are likely to remain out of favor early in 2015 given slowing global demand, which has seen oil and iron ore prices tumble. The Australian dollar rose modestly against the greenback while the Canadian dollar weakened versus the U.S. currency.
Sterling rose 0.28 percent to $1.5563, up from Tuesday's 16-month low. The euro fell 0.1 percent to 78.32 pence. GBP=EURGBP=.
Additional reporting by Jemima Kelly and Patrick Graham in London, Hideyuki Sano in Tokyo and Ian Chua in Sydney; Editing by W Simon and Diane Craft