The dollar surged ahead against the euro here Friday on expectations that the US Federal Reserve will act aggressively on US interest rates if inflation risks develop.
The single European currency at one point fell to its lowest level in two and a half weeks, US$1.1967, before edging back up to US$1.2021 in late-day trading from US$1.2104 in New York on Thursday.
The dollar meanwhile was trading at ?110.02 against ?109.23 on Thursday.
The market spent part of the day digesting the prospect of higher-than-anticipated US rates following overnight comments by St. Louis Federal Reserve Bank president William Poole, a voting member on the rate-setting Federal Open Market Committee (FOMC).
"The dollar received another jolt of adrenalin from Poole," said Margaret Browne, a currency strategist at HSBC USA.
While investors are still looking for a quarter-point hike from the current 46-year low of 1.00 percent on June 30 as the most likely scenario, Poole's hawkish comments echoed those made earlier this week by Fed Chairman Alan Greenspan.
Greenspan told a central bankers' meeting that US interest rates will likely rise at a measured pace but warned that the Fed will do "what is required" to keep inflationary pressures at bay.
Even if the Fed does not hike by half a point this month, analysts said the chances of more aggressive tightening in the months ahead have been raised by the comments.
The July Fed funds contract is now attaching a 28 percent chance to a half point point rate increase from the FOMC on June 30, up from nearly zero at the start of the week.
Elsewhere, sterling recovered some ground but was still down on the day following Thursday's latest quarter-point interest rate hike from the Bank of England.
The euro was changing hands at US$1.2021 from US$1.2104 late on Thursday in New York, ?132.23 (?132.22), ?0.6616 (?0.6566) and 1.5128 Swiss francs (Sf1.5073).
The dollar stood at ?110.02 (?109.23) and 1.2584 Swiss francs (Sf1.2449).
The pound was at US$1.8177 (US$1.8418), ?199.95 (?201.19) and 2.2874 Swiss francs (Sf2.293).
On the London Bullion Market, the price of an ounce of gold stood at US$384.85 from US$384.95 late on Thursday.
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