The US dollar surged against the euro on Friday after comments from Federal Reserve officials prompted revived speculation of further interest rate hikes by the US central bank.
At 2100 GMT, the euro bought US$1.2676, down sharply from US$1.2729 late Thursday in New York. The euro at one point fell to US$1.2652, its lowest reading since July 26.
The US dollar was trading at ?116.88 from ?116.42 on Thursday.
The greenback drew strength from hawkish comments on Thursday by San Francisco Fed chief Janet Yellen.
"The bottom line is this: With inflation too high, policy must have a bias toward further firming," said Yellen, who is normally seen as one of the less hawkish members of the US central bank.
Most analysts expect the Fed to keep its policy unchanged over the months ahead. After 17 consecutive hikes, the central bank last month kept US rates steady.
Fears of the bank turning more aggressive were allayed somewhat Friday by comments from Cleveland Fed president Sandra Pianalto.
She indicated that the bank's pause on Aug. 8 was "to accumulate more information before judging whether additional policy firming would be needed."
But currency analysts at BNP Paribas said that Yellen's tough remarks, "especially from a Fed official who is typically seen as a dove, will allow the market to continue to believe that rates will remain high for longer."
Further support for the greenback came from US Treasury Secretary Henry Paulson, who told students in Hanoi: "I'm very much in favor of a strong dollar because we believe that is in our nation's interest."
Currency analysts at BMO Capital Markets said Yellen's remarks had renewed a focus on signs of inflation in the flagging US economy.
"The euro was not helped by weaker-than-expected German trade data, which remained unchanged due to an increase in imports," they added.
Japanese officials were meanwhile playing down the focus on the yen ahead of a meeting in Singapore of Group of Seven ministers a week on Sept. 16.
A finance ministry official in Tokyo said the global economic outlook, high oil prices and IMF reform would top the agenda for the upcoming G7 meeting, which is to be chaired by Japanese Finance Minister Sadakazu Tanigaki.
But European officials want the G7 to take up the yen's slump against the euro, which could hurt exports from the 12-nation common currency zone.
The Bank of Japan voted unanimously on Friday to maintain its headline interest rate at 0.25 percent, much as expected.
In July, the central bank raised the rate target to 0.25 percent from zero, its first tightening in six years after signs that the world's second-largest economy is finally on the mend.
Despite Friday's no-change verdict, Bank of Japan governor Toshihiko Fukui suggested the institution remains on a rate-hiking path even though inflation has stayed benign.
"His [Fukui's] remarks are consistent with our view that the next 25-basis point hike will come in either October following the next Tankan [business] survey or November after the publication at the end the October of the Bank of Japan's latest twice-yearly inflation forecasts," said Julian Jessop of Capitol Economics.
The pound remained under pressure after British Prime Minister Tony Blair confirmed that he will quit his job within a year.
His announcement on Thursday followed two days of bitter feuding within the governing Labour Party over his future, which culminated in the resignation of eight junior members of the government earlier in the week.