The dollar climbed against most major currencies on Tuesday, after Federal Reserve Chairman Alan Greenspan said US economic growth was solid and inflation was not a threat.
"Not only has economic activity quickened, but the expansion has become more broad-based and has produced notable gains in employment," the Fed chief said as he presented his semi-annual review of monetary policy.
By late afternoon in New York, the euro traded down 0.8 percent at $1.2332 after falling to session lows at $1.2300 shortly after Greenspan's initial remarks. Higher US interest rates tend to enhance the attractiveness of dollar-based assets for global investors.
Currency traders said that Greenspan, who delivered his semi-annual testimony before the US Senate Banking Committee, appeared to reinforce expectations that US interest rates will continue to rise.
"Greenspan's comments were not hawkish but they seemed to acknowledge that down the road there could be further risk of price pressures that could necessitate more aggressive policy tightening and that has helped to lift the dollar in the short term," said Alex Beuzelin, foreign exchange market analyst at Ruesch International in Washington.
"But in order for the dollar to report more significantly sustained gains, the Fed has to be compelled to accelerate its pace of policy tightening, and that does not appear to be likely, at least in the near term," Beuzelin added. Against the yen, the dollar rose to 108.80 yen, up 0.4 percent on the day. The dollar surged against the Swiss franc to trade at 1.2470 francs, while sterling fell 0.8 on the day to session lows at $1.8529.
During the question and answer session following his testimony, Greenspan said flexibility in the global financial system has helped the United States run up a large current account gap but should not be expected to allow a permanent imbalance.
The US needs between $1 billion and $1.5 billion a day to cover the outflow of money due to the current account deficit.