LONDON - The dollar struck its highest level in the week against the euro Friday as investors positioned themselves for another interest rate hike from the US Federal Reserve next week.
The euro fell to 1.3212 dollars in late European trade from 1.3375 late on Thursday in New York.
The dollar rose to 104.71 yen from 104.55 on Thursday.
In addition, the dollar remained buoyed by the technical bounceback seen since disappointing US current account data earlier this week and as investors continued to shun emerging markets, such as Poland and Peru.
Before the Fed started raising its key Fed funds rate last summer, the cost of borrowing in the United States, at 1.00 percent, was 1.0 percentage point lower than the European Central Bank.
Now US interest rates are up at 2.50 percent, compared with 2.0 percent in Europe, and are expected to be hiked a further quarter point at the next rate-setting meeting on March 22.
Although another quarter point rise was widely priced in, analysts said there was some risk that the Fed would introduce greater flexibility in its language despite Friday's weaker-than-expected consumer confidence survey from the University of Michigan.
Its headline sentiment index fell for the third month running to 92.9 in early March from 94.1 in February and expectations of an increase to 94.9.
"Market reaction is likely to be limited, with the dollar likely to continue enjoying its end-week bounce and interest rate markets remaining under some, albeit limited, pressure," said Mitul Kotecha, head of global currency research at CALYON.
Lower oil prices also have taken some of the pressure off the dollar.
"Oil prices have backed off the recent record high and this is lending a degree of support to the dollar," said Paul Jackson, a senior foreign exchange dealer with CMC Group in New York.
"Although the fall in crude has only been very marginal, essentially it's a move in the right direction and there's also a growing consensus that the high prices are unlikely to damage consumer confidence, at least for the time being."
In addition, reports that South Korea has no plans to change the proportion of reserves it holds in the US currency have helped underpin the dollar.
Although the Wall Street Journal article said the South Korean central bank is looking to maximise profits from its foreign-exchange holdings by investing in a broader range of assets, it had no plans to alter its dollar reserves.
Last month, the Bank of Korea sparked a wave of dollar selling when it said it intended to "diversify" its reserves, which traders interpreted as a hint that the bank would start selling the sliding dollar.
That overall theme of dollar diversification by reserve banks has been a major backdrop in the currency markets over the last few months.
The euro was changing hands at 1.3212 dollars against 1.3375 late on Thursday in New York, 139.41 yen (139.85), 0.6936 pounds (0.6948) and 1.5511 Swiss francs (1.5476).
The dollar stood at 104.71 yen (104.55) and 1.1652 Swiss francs (1.1567).
The pound was trading at 1.9190 dollars (1.9249), 200.97 yen (201.20) and 2.2361 Swiss francs (2.2269).
On the London Bullion Market, the price of an ounce of gold stood at 437.15 dollars against 438.60 dollars late on Thursday.
03/18/2005 18:41 GMT