The US dollar extended gains against the euro and the yen in afternoon Asian trade today on speculation the Federal Reserve may raise its key interest rates by the end of the year to curb inflation.
For the second straight day yesterday, Fed Chairman Ben Bernanke reiterated his concern about inflation in the United States. The average inflation rate in the US was about 3.5 per cent over the last four quarters, way above where the Fed wants it to be, Mr Bernanke said.
"Mr Bernanke is a bit hawkish. We are seeing a gradual shift in the Fed's monetary policy and it is more concerned about inflation. The currency market is betting the next move by the Fed could be a rate hike," said Tomoko Fujii, head of economic strategy at Bank of America in Tokyo.
Higher rates may encourage investors seeking higher yields on their funds to buy US-denominated assets such as Treasuries, boosting the dollar.
At 6am (Irish time), the euro was trading at $1.5402, down from $1.5436 in Sydney this morning. The euro fell to as low as $1.5389 at noon.
The dollar was buying 105.54 yen, up from 105.28 yen.
"Bernanke has commented for the second time that he is worried about inflation. That boosted speculation in the currency market that the Fed's next move will likely be a rate hike than a rate cut," said Mark Wan, chief analyst at Hang Seng Investment Services.
The dollar has plunged to record lows against the euro and to multi-year lows versus the yen in previous months after the Fed lowered rates by 325 basis points from September to April. Last month, the Fed signalled its rate-cutting cycle may be over as it focuses on fighting inflation.
Further helping lift the US currency are expectations that the European Central Bank (ECB), which will hold a rate-setting meeting later today, will keep its benchmark rate unchanged as the 15-member euro zone area battles a weakening economy and an accelerating inflation rate.
Agencies