The euro unraveled against the dollar here Friday as the greenback found favor with investors on Federal Reserve comments suggesting that US interest rates could rise sooner than expected.
The yen meanwhile fell sharply on reports that Japan may have raised its terrorism alert level.
The single currency was trading at US$1.2563, down from US$1.2711 late Thursday in New York.
The dollar rose to ?108.81 from ?107.02 on Thursday.
Dealers said that despite Friday's trend, the dollar's decline was likely to continue.
"The violent dollar bounce has likely been position-squaring," said Citibank currency strategist T.J. Marta.
"Fundamental considerations have not changed and so we see little potential for further dollar upside in the near term," Marta said.
On Wednesday, the euro had hit a record high of US$1.2929.
Economists pointed to remarks from the head of the Federal Reserve Bank of St. Louis, William Poole, who said US inflation rates should remain near current low levels even as stronger economic growth begins to create a "significant" number of new jobs.
The euro may have come in for selling pressure on Poole's prediction of strong employment gains, which could eventually induce the Fed to raise rates.
Poole said productivity gains would slow this year to around three percent from 4.2 percent this year.
"This analysis leads me to expect higher employment growth in 2004," he said, quoting consensus forecasts of around 150,000 to 170,000 a month.
Analysts in addition noted that the weakening of the euro against the dollar could have been caused by the sharp slide in the yen against the greenback.
The US currency shot up to its highest level against the yen since Dec. 2, last year, or ?109.6. The pound sterling climbed to ?203.5, it best showing since November 1998.
The euro was changing hands at US$1.2563 from US$1.2711 late on Thursday in New York, ?136.70 (?136.05), ?0.6727 (?0.6711) and 1.5792 Swiss francs (Sf1.5754).
The dollar stood at ?108.81 (?107.02) and 1.2567 Swiss francs (Sf1.2393).
The pound was at US$1.8672 (US$1.8931), ?203.18 (?202.65) and 2.3470 Swiss francs (Sf2.3462).
On the London Bullion Market, the price of an ounce of gold stood at US$405.25 against US$409.80 late on Thursday.
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