The dollar hit a one-month high against the euro and a six-week peak versus the yen on Tuesday as investors bought the US currency on growing expectations of a US rate hike this month. More Federal Reserve officials talked tough on fighting inflation this week ahead of key inflation data due on Tuesday and Wednesday.
A global sell-off in equities, commodities and emerging markets also boosted the greenback, and the euro took a further knock from a weak reading in Germany's closely-watched ZEW indicator for June.
"What has really been driving the currency markets has been the changed view on the Fed," said Niels From, currency strategist at Dresdner Kleinwort Wasserstein in Frankfurt.
"We are seeing a continued rise in risk aversion, and the ZEW was not really supportive for the euro." The euro hit a one-month low of $1.2558 in Tokyo trade, but had steadied at $1.2584 by 1150 GMT. The dollar also hit a six-week high against the yen at 114.77 yen, before easing slightly to 114.57 yen, slightly up from the US close.
The dollar hit a one-month high on an index of currencies at 86.20. The German ZEW economic sentiment indicator gave a reading of 37.8 in June, below the forecast 45 and 50.0 in May.
The euro has been under pressure since the ECB raised rates by 25 basis points to 2.75 percent last week - less than some people had expected - and signalled it was not planning to step up the pace of its current once-a-quarter monetary tightening.
Markets are awaiting US producer prices data at 1230 GMT, with core PPI expected to have risen 0.2 percent on the month. Consumer prices data are due on Wednesday.
"If the PPI data is higher than expected, the euro could carry on going down," said Peter Wuyts, market analyst at KBC in Brussels. At 1500 GMT Fed chairman Ben Bernanke gives a talk on consumer issues and will take questions. It is the second of three public events he will take part in this week.
Sterling matched a three-week high against the euro after data showing stronger than expected British inflation of 2.2 percent year-on-year in May, above the Bank of England's 2.0 percent target for the first time in six months.
The Icelandic crown fell around 1 percent on the day against the dollar and euro, as comments by Fitch ratings agency about the risk of a hard landing in Iceland added to losses caused by a broad slide in emerging markets.
Cleveland Fed President Sandra Pianalto said on Monday that current core consumer prices exceeded her "comfort level" if sustained, driving home the message that the Fed will keep raising rates if necessary to contain inflationary pressures. Dallas Fed President Richard Fisher said the central bank was experiencing "some angst" over inflation.
A number of Fed officials - including Bernanke last week - have expressed similar sentiments, convincing investors that the Fed will lift rates for a 17th straight time to 5.25 percent at its meeting ending on June 29.
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