The dollar hit a five-month high against the yen and a two-month peak versus the euro on Tuesday, bolstered by expectations that the U.S. Federal Reserve could raise interest rates more aggressively to ward off inflation.
Federal Reserve Chairman Alan Greenspan is due to speak on energy later in the day. Any hint the U.S. central bank chief is growing worried about the inflationary impact of soaring oil prices could give a further boost to the dollar.
"Cyclical factors are very heavily in the dollar's favor at the moment and many people are anticipating Greenspan to sound more hawkish," said Adam Cole, senior currency strategist at RBC Capital Markets.
Sluggish growth in Japan and the euro zone means interest rates in these areas are likely to stay below U.S. rates for now, making returns on dollar assets more attractive than on the euro or yen.
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.
The dollar pushed to five-month highs of 108.89 yen and a two-month high of $1.2806 per euro in early European trade and by 1000 GMT the dollar fetched 108.59 yen and $1.2823 per euro, up around a quarter of a percent against both currencies on the day.
Technical analysts said the dollar's rally above 108 yen on Monday could have spelt the end of the greenback's three-year downtrend. Any move beyond technical resistance at $1.2730 to the euro is also expected to accelerate the dollar's rise.
Sterling hit a six-month high against the euro at 68.27 pence, supported by a survey which said British house prices rose 0.5 percent in March and data showing Britain's services sector expanded at its fast pace in 10 months.