The dollar rose to a five-month high against the yen and a two-month peak versus the euro on Tuesday on expectations the Federal Reserve could hasten the pace of interest rates rises to ward off inflation.
The relative softness of the Japanese and euro zone economies also means that interest rates in those areas will likely stay below U.S. rates for now, making the dollar more attractive than the yen and the euro.
"The market is right now focusing on interest rate gaps," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp. "But I think a lot of recent dollar buying is speculative rather than real buying to take advantage of higher yields."
The dollar gained upward momentum as it tripped key technical levels, extending a rally that began when the Fed suggested two weeks ago that it could raise rates more quickly than its current moderate pace if inflation heated up.
For a clue about whether the Fed will raise rates faster, traders have turned their attention to a speech by Fed Chairman Alan Greenspan on energy, slated for 1350 EDT.
Any indication that Greenspan is worried that soaring oil prices will accelerate inflation would give the dollar a further boost, dealers said.
That is in sharp contrast to last year when the rise in oil prices to record highs was seen as hurting the U.S. economy and negative for the dollar.
By 0217 EDT, the dollar fetched 108.65 yen, just off the day's peak of 108.72 yen, the highest level since Oct. 20. It was at 108.30 yen in late U.S. trade on Monday.
The euro was just above the day's low of $1.2816, which was also its lowest mark since Feb. 10. It stood at $1.2847 in late New York trade.