Dollar hits 2-1/2-week high against euro

The dollar hit a 2-1/2 week high on the euro on Thursday as expectations rose the Federal Reserve might aggressively raise interest rates to contain inflation, while the yen pressed higher after robust Japanese data.
The Bank of England raised UK interest rates by a quarter of a percentage point, its fourth hike in eight months, taking the cost of borrowing to 4.5 percent but knocking sterling down in a big wave of profit-taking.
The chief focus remained renewed expectations that the Fed would be more aggressive in raising rates than anticipated even after an expected hike at the end of June, after Fed officials including chairman Alan Greenspan said this week the bank would do what is required to keep inflation in check.
"Greenspan's objective was to try to persuade the market the Fed is not behind the curve. The reaction was dollar positive. In Japan, optimism (on the economy) is higher," said Neil Nuttall, senior currency strategist at J.P. Morgan Fleming Asset Management.
The dollar hit a 2-1/2 week high of $1.2024 per euro before trimming gains to $1.2039 by 1145 GMT. It was down 0.5 percent on the day at 109.80 yen, having hit a one-month low of 108.64 on Wednesday.
Sterling initially jumped a quarter of a cent and gained on the euro after the Bank's decision but within half an hour had shed an entire cent to $1.8195. It was also half a percent weaker on the day against the euro, having hit a two-month peak earlier in anticipation of higher rates.
"Market expectations have been fulfilled and the market was pretty long of sterling versus the euro beforehand. It was an understandable profit-taking response," said Tim Fox, market strategist at National Australia Bank.
In New Zealand, the central bank also raised rates by a quarter percentage point to 5.75 percent and said more tightening was likely in coming months.
The decision was widely expected but the continued hawkish stance sent the New Zealand dollar more than one percent higher on the day against the US dollar.
The Fed next meets on June 29-30. US rates are at 46-year lows of 1.0 percent and have been a contributor to dollar weakness over the past year.