The dollar headed for its best monthly performance in 2-1/2 years against a basket of major currencies and rose further from this week's record lows versus the euro, boosted by improved sentiment on the US economy.
The number of US workers filing initial claims for unemployment benefits unexpectedly fell last week, data showed yesterday, while figures on US durable goods were also stronger than expected.
Having been pessimistic on the US economic outlook for some time, investors are now embracing upside data surprises, analysts say. Investors are trying to assess the Fed's thinking on how much further interest rates need to fall to limit the impact of the global credit crisis.
Fed futures are now pricing in a 26 per cent chance of interest rates being held at 2.25 per cent this month rather than being cut. Just over a week ago, the futures pricing was evenly split between a 25 and a 50 basis point cut.
At the same time 'flight to quality' trades are also reducing, with US 2-year Treasury yields hitting their highest level in over three months and gold prices hovering near three-week lows.
ING head of FX strategy Chris Turner said the dollar's gains might prove temporary, with the currency's fortunes seen fading again once the Fed makes its rate decision next week.
"We have two stories here, one is the brief reversal of the flight to quality trade in the US... which is quite positive for the dollar, and the other is independent euro weakness beginning to come through," Turner said.
"Net-net, we think the pick-up in US yields is temporary and hence the dollar rally should also prove temporary."
The dollar index, which tracks its performance against a basket of major currencies, hit a one-month high of 73.030, putting it on track for its best monthly performance since the autumn of 2005.
The euro fell as far as $1.5555, its lowest since April 3rd, a drop of around 0.5 per cent on the day and on track for its biggest monthly decline in nearly a year.
In contrast to slightly stronger US data, the Ifo German business sentiment index this week showed the biggest monthly fall since September 2001 on Thursday, taking the April headline number to a two-year low.