The dollar rallied across the board on Friday, posting its biggest weekly rise against a basket of currencies in more than a year, on profit-taking in the euro and month-end squaring up of positions by corporates.
The greenback was also supported by optimism that further Federal Reserve interest rate cuts would help the world's biggest economy avoid a recession, temporarily shifting market focus away from a diminishing yield appeal.
The dollar index, which measures the greenback's performance against six major currencies, rose 0.8 percent to 76.159. On the week, it was up about 1.2 percent, marking its largest weekly gain since early June 2006.
Traders attributed the dollar's surge to a combination of factors ranging from month-end transactions, chart levels, and a drop in the price of gold. Gold tumbled to a 10-day low on profit-taking.
"What we are seeing today is end of month and towards the end of the year profit-taking and squaring up of positions. That should lead the dollar to strengthen a little bit," said Mark Meadows, a currency strategist at Tempus Consulting in Washington.
"All the bad news for the dollar is factored in already. It's likely that from here until the end of the year the dollar may see bit of a reprieve," he said, adding that the euro could slip to $1.45 by year end. In late New York trade, the euro was quoted at $1.4631, down 0.7 percent on the day and its lowest level in more than a week. It earlier scaled a session peak of $1.4784 in overseas trade.
The dollar also got a lift from a magazine report that Bahrain would maintain the dinar's peg to the greenback as Opec prepares to meet next week amid growing pressure on some Gulf states to depeg their currencies of the sluggish dollar.
Fed Chairman Ben Bernanke hinted late on Thursday that the central bank might cut rates to help the economy weather a resurgence of financial market turmoil.
Lower US interest rates usually weigh on the dollar because they reduce the yield on dollar-denominated assets, but this time analysts said the market was taking a longer view.
"Even if the US lowers their rates in December it's very unlikely that the ECB is going to increase rates any time soon. The euro is losing some of its buoyancy because of that," he said, adding the euro could correct down to $1.45.
The more optimistic market mood has boosted the dollar against both the high and low yielding currencies. The dollar was up 1.2 percent at 111.17 yen, well off a 2-1/2-year low of 107.20 yen hit on Monday, according to Reuters data. The euro was up 0.5 percent at 162.66 yen, and the dollar gained 1.3 percent against the low-yielding Swiss franc to trade at 1.1322 francs.
The dollar rose 0.3 percent to 99.98 Canadian cents, while the New Zealand dollar fell 1.0 percent to US $0.7633. In remarks to the Charlotte Chamber of Commerce, Bernanke said a resurgence in financial market strains had dimmed the outlook for the US economy, suggesting the central bank will cut rates when it meets on December 11.
But some analysts still said the market was likely to continue being driven by interest rate differentials rather than stronger growth prospects and expected further monetary easing to undermine the dollar.