The dollar gained broadly on Wednesday, supported by hawkish comments from a Federal Reserve official that helped cement views that the U.S. central bank's cycle of aggressive interest rate cuts may be nearing an end.
Kansas City Fed President Thomas Hoenig late Tuesday said that rates will need to be raised in a timely way as the central bank grapples with a serious threat of inflation, prodding the euro towards a five-week low versus the dollar.
The euro also fell on reports showing euro area retail sales were much weaker than expected, falling in monthly as well as annual terms, while German manufacturing orders unexpectedly fell by 0.6 percent in March -- underlining concerns about the slowing economy.
"Kansas City Fed President Hoenig, who is not on the FOMC this year, warned that inflation is 'troublesome' and too high," said Benedikt Germanier, senior currency strategist at UBS in Stamford, Connecticut.
"He suggested that when the Fed is ready to raise rates, it may do so relatively quickly."
The euro traded lower on the day against the dollar, off around 3.5 percent from the record peak struck on April 22.
The dollar rose versus the yen.
Against a basket of currencies the dollar gained.
A run of poor economic data has pressured the euro in recent weeks after it hit a record high above $1.60, peeling away perceptions that the euro area was insulated from the U.S. downturn.
French trade data added to the bearish picture; the euro zone's second biggest economy reported a record trade deficit for March.
Still, the European Central Bank is expected to hold interest rates steady on Thursday at 4 percent, leaving the focus on the post-decision briefing by ECB president Jean Claude Trichet, who is expected to maintain a hawkish line on inflation.
"The euro zone retail sales were particularly disappointing, it does suggest that European consumers are slowing down. All the data suggest the outlook is deteriorating for Europe and that's consistent with downward pressure on the euro," said Teis Knuthsen, currency strategist at Danske Markets in Copenhagen.
Also boosting the dollar were comments from U.S. Treasury Secretary Henry Paulson, who told the Wall Street Journal in an interview that "the worst is likely to be behind us" from the crisis spawned by surging defaults on U.S. home mortgages.
But some analysts said that investors may be getting too optimistic about the dollar's outlook as a rate rise by the Fed was unlikely to help the U.S. economy, given that inflation pressures have been prompted by high oil prices, rather than consumer demand.
"Interest rates at their currently low level are going to be necessary for some time, irrespective of inflation pressures to make sure that a recession or even a depression is avoided in the United States over the next 12-18 months," said Adam Myers, market strategist at Credit Suisse in London.
The inflationary pressures reflected in oil continued, with U.S. crude sitting at $121.75 a barrel compared with Tuesday's record high at $122.73.
Further clues on the outlook for the problematic U.S. homes sector are expected later with the release of pending home sales data for March at 10 a.m. New York time.
A report showing U.S. businesses cut back on worker hours during the first three months of this year as the economy slowed, driving up productivity to a higher-than-expected 2.2 percent annual pace, had little impact on foreign exchange trading.