The euro hit a two-year high against the dollar on Friday, coming within half a cent of a lifetime peak as investors compared prospects for rate hikes in the euro zone with those for rate cuts in the United States.
Although euro zone interest rates are below those in the US, the region's robust growth and inflation pressures will probably prompt the European Central Bank to raise rates again in June, a view reinforced by hawkish comments from Governing Council member Axel Weber.
In contrast, the US Federal Reserve is widely expected to cut rates at least once this year, from 5.5 percent. The lack of opposition from policymakers to a strong euro this time, unlike in 2004, has also contributed. Eurogroup chairman Jean-Claude Juncker and other finance ministers said on Friday the euro's strength was no reason to panic.
"There is little political complaints (about euro strength) - signalling admittance this is generic dollar weakness," said Adrian Hughes. "Currency markets know that high inflation high and low activity are not very good for the US dollar. The overall tone of the market is that eventually the Fed will cut interest rates."
The euro rose as high as $1.3637, approaching the record high of $1.3670 set in December 2004, before trimming gains to stand at $1.3611 at 0950 GMT. It was up 0.2 percent at 161.55 yen, having hit a record peak of 162.42 this week.
The dollar was up slightly on the day at 118.70 yen. With official interest rates at just 0.5 percent, and seen rising only very gradually, the yen is a favourite funding currency for carry trade investments in higher return units. The ECB is set to raise interest rates to 4 percent in June with the risk of another move to 4.25 percent later this year. Weber said in a newspaper interview inflation risks exist in the medium term and the ECB must act against them.