The dollar surged on Friday after a senior Federal Reserve official hinted the United States could accelerate the pace of raising interest rates and Washington pledged for a tighter budget and strong dollar policy. St. Louis Federal Reserve President William Poole told Reuters that the central bank would not hesitate to depart from its pace of measured interest rate increases if necessary.
"The latest surge in the dollar came after comments from Poole, who suggested the Fed could raise rates more and faster than expected," said Carsten Fritsch, currency strategist at Commerzbank in Frankfurt.
US President George W. Bush said in an interview on Thursday that the budget he proposes next month will freeze spending for some programs and deny funding to others to meet his deficit reduction goals.
"There's a perception in the market that something tangible may be coming out (from the Bush administration) to tackle the budget and current account deficits," said Kamal Sharma, foreign exchange strategist at Dresdner Kleinwort Wasserstein.
Bush repeated the administration's strong dollar policy and said he was confident foreign investors would find the US a good place to invest.
By 1230 GMT, the dollar stood at $1.3102 per euro, having risen more than one percent on the day to $1.3057 earlier.
The yen was supported after European Central Bank President Jean-Claude Trichet joined the chorus for flexible Asian regimes on Thursday, urging Asia to bear the burden of dollar weakness.
The Japanese currency hit a seven-week high against the euro of 134.40. It traded at 102.64 yen per dollar, down a quarter of a percent from late New York on Thursday.
In the last three months of 2004, the dollar fell more than eight percent against the euro as the market focused on the US ability to fund its huge current account and budget deficits.
Pressure on the euro mounted after ECB President Jean-Claude Trichet on Thursday supported ECB Chief Economist Otmar Issing's remarks earlier in the week that Asian currencies must do more to bear the burden of dollar weakness.
The comments were seen as directed at China and the pegging of its currency to the dollar, which some nations say gives it an unfair trade advantage. The Asian currency issue is in focus ahead of a meeting of finance ministers and central bankers from Group of Seven rich nations in London in February.
"The yen benefited from comments from Issing and Trichet. There will be much noise in the market ahead of the G7 meeting," Fritsch said.