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US dollar gains in anticipation of rate hikes ahead

The US dollar gained ground on Friday against the other main currencies as the market focused on the prospect of further increases in US interest rates.

The euro fell to US$1.2778 at 2100 GMT from US$1.2857 late on Thursday in New York.

The dollar rose to ?111.71, from ?110.82 late on Thursday.

Against the euro, the US dollar hit an eight-day high, and against the yen at an 11-day high on growing expectations that inflation concerns might prompt the US Federal Reserve to raise interest rates again next month.

Stronger-than-expected core inflation data earlier this week and hawkish comments from officials on Thursday suggested that a hike at the next meeting of US rate-setters on June 29 may be forthcoming.

This marked a change from recent speculation that the Fed would pause next month before deciding whether to raise rates further.

"The market is beginning to expect another interest rate hike in the US and this has supported the dollar," said Standard Chartered currency analyst Marios Maratheftis.

In itself, another 25 basis point hike would have little impact, but the shift in rate expectations has had a significant effect on sentiment, he said, adding that the market is pricing in around a 60 percent chance of a rise on June 29.

"Interest rate speculation is dollar supportive," said AG Edwards' analyst Jessica Madsen.

"The view that the Federal Reserve would need to raise lending rates to stem inflation was widely supported by bullish economic data this week, in particular, the higher-than-expected April consumer price index," Madsen said.

On Thursday, Richmond Fed president Jeffrey Lacker was quoted as saying that the inflation outlook was "at the borderline of acceptable," making a pause in rate hikes less likely.

Meanwhile, St. Louis Fed president William Poole said the risks to inflation were "tilted to the upside" and a softening economy would not necessarily take away the inflation problem. He reiterated, however, that the Federal Reserve's next rate decision would depend on upcoming data.

In late New York trade, the US dollar stood at 1.2163 Swiss francs from 1.2047 on Thursday.

The pound was being traded at US$1.8802 after US$1.8954.
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