The dollar struck a 3-1/2-month high against the yen today after Federal Reserve officials talked tough on inflation, boosting expectations for higher US interest rates this year.
The dollar also held sharp gains made versus the euro this week, after Dallas Fed President Richard Fisher said yesterday the US central bank would not allow inflation expectations to rise unchecked, echoing comments made by Fed Chairman Ben Bernanke a day earlier.
Strong warnings about inflation risks from Fed officials came amid an unexpected barrage of remarks from Treasury officials, who have said they are keeping an eye on the dollar and keeping options open for dollar-buying intervention to stem its slide.
Traders said the dollar would likely extend its broad rally if more Fed officials scheduled to speak later in the day voiced concerns about inflation and supported expectations for higher interest rates.
Investors are now eyeing up to three quarter-point rate hikes from the Fed later this year, even as the economy is still struggling from housing-related troubles.
"The market is moving along with what seems to be a shift in US policy to halt the dollar's slide," said Toshihiko Sakai, a manager of forex trading at Mitsubishi UFJ Trust and Banking. "The dollar could reach as high as 112-115 yen in the next few months instead of falling towards 90 yen."
The euro edged up 0.1 per cent from late US trade yesterday to $1.5473 recovering a tad from a 2 per cent drop over the previous two days.
The euro was supported against the yen as European Central Bank officials have signalled that a rate increase could come as soon as next month to limit the inflationary impact on the economy from soaring oil prices.
The yen also suffered as Asian equity markets posted gains, spurring some return to carry trades - using the low-yielding currency as a cheap source of funds for higher-yielding currencies.
The dollar climbed 0.2 per cent to 107.68 yen and rose as far as 107.76 yen, the highest since late February. The euro climbed 0.3 per cent to 166.68 yen pushing back near a seven-month high of 167.15 yen hit last week.