The dollar surged to fresh one-month highs against the euro and Swiss franc on Friday, accelerating its upward momentum since Federal Reserve Chairman Alan Greenspan's upbeat assessment of the US economy and relatively tough talk on interest rates earlier this week.
There were no major US economic data to trade on so Greenspan's two-day congressional testimony, which reinforced expectations of gradual rate hikes by saying US growth was on a solid footing and inflation was no threat, continued to weigh heavily on the market.
Dealers scrambled to get out of short dollar positions, effectively betting the dollar will weaken, particularly against the euro and Swiss franc. The fact that so many market participants were on the same side exacerbated the dollar's gains, which were mirrored against most other rivals.
"I find this move to be position liquidation and stop (loss) hunting," said John McCarthy, director of foreign exchange research at ING Capital Markets in New York.
"People got overly bearish on the dollar prior to Greenspan," he said, and they are being forced to rethink, at least for now.
"People who are short dollars are afraid that the Fed is right, and that the run of soft growth numbers from the US is just temporary and that there are more robust numbers ahead, and so it is time to take profits if there are any," said Sean Callow, currency strategist at IDEAglobal in New York.
By late afternoon in New York, the euro was over 1 percent weaker at $1.2099. It had earlier hit a one-month low of $1.2089, marking a sharp turnaround from the 4-1/2-month high around $1.2460 it touched only on Monday.
The dollar was up around 1.5 percent at 1.2665 Swiss francs, just below its new one-month high of 1.2685 francs.
ING's McCarthy noted that Greenspan's comments, particularly his confidence that June's soft economic data were transitory, has helped trigger "considerable" dollar purchases against European currencies.
But he questioned how much longer this can run. "It's hard to believe people are buying dollars at these levels thinking it's going to go any higher," he said.
Rising interest rates remain the underlying scenario, which analysts say should support the dollar since it increases the attractiveness of safe-haven US assets for foreign investors and makes it more expensive to bet against the US currency.
Analysts say this is why higher-yielding currencies like sterling and the Australian dollar, which have appreciated sharply against the dollar this year, are now coming under heavy selling pressure.
Sterling fell 0.6 percent to $1.8323, while the Australian dollar was 0.7 percent weaker at $0.7096. Both made new 3-1/2-week lows on Friday.
Against the yen, the dollar's gains were more limited, thanks to less extreme positioning in that currency and good offers from Japanese exporters above 110.00 yen, dealers said. In late afternoon trading, the dollar traded 0.3 percent higher at 110.10 yen, still not far from a 5-1/2-week peak of 110.31 set earlier this week.
The yen was also weighed down against the dollar by losses in Tokyo stocks and a surprise fall in a gauge of Japan's services sector.
Chicago Federal Reserve Bank President Michael Moskow on Friday reinforced the message of interest rate increases. In a speech, he said the Fed can probably raise interest rates at a measured pace. Should the economy overheat, the Fed will move more aggressively, he added.
Meanwhile, the price of gold, which often moves in the opposite direction to the dollar, slumped to a one-month low before settling at $390.50 an ounce on Friday. But US equities lost ground and a modest rise in bonds pushed yields slightly lower.
While these developments were hardly dollar-friendly, the greenback still strengthened, analysts noted.