The dollar continued to rise sharply as speculation intensified that the Federal Reserve may raise interest rates further in June. Recent evidence of softening in some areas of the US economy, coupled with hints from Fed officials, led markets to expect that the Fed would pause in hiking rates next month. Stronger-than-expected core inflation data earlier this week and hawkish comments from officials yesterday, however, suggested that a hike next month may be forthcoming after all. "The near term bearish outlook for the dollar is being hindered by concerns that the Fed will need to keep raising interest rates rather than pausing at next month's FOMC meeting," said UBS currency analyst Mansoor Mohi-uddin. Richmond Fed president Jeffrey Lacker was quoted yesterday as saying that the inflation outlook was "at the borderline of acceptable", making a pause in rate hikes less likely. Meanwhile, St Louis Fed president William Poole said the risks to inflation were "tilted to the upside" and a softening economy would not necessarily take away the inflation problem. He reiterated, however, that the Federal Reserve's next rate decision on June 29 would be dependent on upcoming data. "Overnight comments by Fed officials suggest that the case for a rate hike by the Fed in June is growing should inflation data not slow down before then," Mohi-uddin said. In addition, the ongoing sell-off in emerging markets put pressure on the euro as central bank reserve diversification is expected to slow. "The reversal of equity capital flows into emerging markets will directly impact the pace of central bank reserve accumulation in the region, in turn diminishing the resulting reserve diversification demand for G10 currencies," said Steve Pearson at HBOS. Elsewhere, the Canadian dollar continued to fall against its US counterpart, reaching three-week lows after weaker-than-expected Canadian CPI data yesterday questioned the need for more rate hikes.