The dollar climbed to one-month highs against the euro on Monday, as investors bought the greenback amid increased expectations that the Federal Reserve will raise interest rates again later this month.
The dollar looked to extend its 3.2 percent rally against the euro from last week, with Fed officials intent on relaying a message to financial markets that they plan to raise rates to stave off inflation.
"The market is putting the stronger dollar down mostly to a revisiting of the FOMC (Federal Open Market Committee) outlook (and) the fed funds futures curve currently almost priced for a 25 basis points move later this month," said Michael Jansen, currency strategist at National Australia Bank in New York.
The Fed is widely expected to increase rates by a quarter-percentage point for the 17th consecutive time to 5.25 percent at its June 28-29 meeting.
By late afternoon trading, the euro fell 0.4 percent to $1.2588. The euro earlier plumbed a one-month low of $1.2567, down about 4 cents from a one-year high of $1.2979 touched a week ago, according to Reuters data.
With futures markets almost fully pricing in a Fed rate increase at this month's meeting and several central banks around the world tightening credit, speculative investors have widely pulled back their exposure to risk by trimming their bets against the dollar.
Currency speculators have reduced their net short dollar position against major currencies, except the euro, whose long contracts surged to a new record of 88,196, according to data on Friday from the Commodity Futures Trading Commission.
"The build-up in IMM (International Monetary Market) spec longs in euro/dollar created the conditions for a larger correction in the (currency pair) than in other majors. We would see dips to the $1.24 handle as buying opportunities," said Naomi Fink, senior currency strategist at BNP Paribas in New York.
Also on Monday, the Treasury Department released monthly budget figures, which showed a larger-than-expected deficit of $42.83 billion in May. Wall Street economists polled by Reuters were expecting a $39 billion budget deficit last month.
The euro trimmed losses against the dollar after the US budget data, although the greenback remained well-supported overall.
Against the yen, the dollar was up 0.3 percent at 114.36 yen, just off a six-week high of 114.72 yen hit last week. The dollar firmed 0.2 percent against the Swiss franc to 1.2335 francs. Sterling was up at $1.8429.
Meanwhile, comments on Monday from Cleveland Fed President Sandra Pianalto, a voting FOMC member, and Dallas Fed President Richard Fisher were consistent with generally hawkish rhetoric from officials at the US central bank. Currency markets, however, showed little reaction to their comments.
Pianalto said a sustained rise in core inflation would exceed her "comfort level," while Fisher said the Fed is keeping tabs on the extent to which costly energy is feeding into US consumer prices.
The day, meanwhile, was culminating with a speech on banking supervision by Fed Chairman Ben Bernanke - one of three speeches by Bernanke this week - in Washington.
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