EU focus: Dollar rally pauses in Asia; NZD sinks on rate lull

The U.S. dollar stayed well supported thanks to higher Treasury bond yields, while the New Zealand currency slumped after dovish comments from the country's central bank.

The 2-year U.S. note yield hit a 4-1/2 month high of 0.64%, though the 10-year yield stepped back a little to 3.27% from 3.33%.

"Now we've seen yields jump sharply and arguably they look like they may have found a level where they may have reached a high point, perhaps that'll cause the dollar rally to settle down," said Greg Gibbs, strategist at RBS. "But this time of year, you sense that people are squaring positions up. The market still has a few short dollar positions out there and this is adding to the excuse for the dollar to strengthen."

The European Commission welcomed Ireland's tough 2011 austerity budget, which received a first approval from parliament, opening the way for international loans to start flowing to Dublin.

In contrast, the New Zealand dollar dropped to a one-week low after the Reserve Bank of New Zealand said it expected interest rates to rise less over the next two years than it had previously forecast.

The RBNZ left rates unchanged at 3.0% as expected but said rates should stay low for longer.

"The kiwi sagged given the much watered down tightening bias," said Annette Beacher at TD Securities. "We can finally confirm that we are pushing out the next rate hike from March to July."

Market attention, however, is turning to China, where speculation of an interest rate hike gained momentum after Beijing brought forward the release of November data, including the closely watched inflation figures to Saturday from Monday.