The dollar jumped as top Treasury and Federal Reserve officials voiced concern about its recent slide, raising the chances that officials could step into the foreign exchange market to support the U.S. currency.
The dollar rose by more than 1 percent against the euro and yen after Treasury Secretary Henry Paulson declined to rule out intervention and New York Fed President Timothy Geithner said the central bank pays close attention to the dollar.
"It seems the Fed and Treasury feel the need to help underpin the dollar," said Omer Esiner, senior market analyst at Ruesch International in Washington.
"There's a growing consensus among policy makers that to let some steam out of the commodity bubble, they need to see the dollar appreciate, and this is a step in that direction."
By late afternoon, the dollar was up 1.3 percent at 106.28 yen, while the euro fell 1 percent to $1.5626, off a session high of $1.5845. The euro rose 0.3 percent to 166.08 yen after earlier hitting 167.15.
Dallas Fed President Richard Fisher also chimed in on Monday, saying a weak dollar can create a "negative feedback loop" that spurs inflation and saps growth.
The remarks come shortly after Fed Chairman Ben Bernanke last week linked the weak dollar to rising import prices and consumer price inflation, prompting a brief wave of dollar buying.
Those gains were wiped out a day later when European Central Bank President Jean-Claude Trichet said euro zone interest rates could rise in July to counter inflation, pushing the euro to within two cents of an all-time high above $1.60.
Trichet reiterated that message at a conference in Paris, and analysts said ECB rate hikes could complicate efforts to intervene to stabilize the dollar.
"I think they are trying to jawbone the dollar higher right now, but if that fails, there is the risk of intervention if the euro goes back to the $1.60 neighborhood," Esiner said.
Indeed, Paulson also said on Monday that the long-term U.S. economic fundamentals would eventually "shine through" in the greenback's value.
But he also told CNBC, "I would never take intervention off the table or any policy tool off the table. I just can't speculate about what we will or won't do."
Analysts warned that intervention would carry risks. "There is nothing like unsuccessful intervention to turn an orderly foreign exchange market into one that smacks of crisis," said RBS Greenwich Capital international strategist Alan Ruskin.
Lehman, Housing Data Lend Support
The dollar also got a boost from Lehman Brothers' plans to raise $6 billion in fresh capitalon the view that it could help stabilize the U.S. financial sector.
The Wall Street bank announced its plan after posting a $2.77 billion second-quarter loss.
A 6.3 percent rise in U.S. pending home sales in April also added to dollar optimism, while a small drop in oil prices from Friday's record high of $139.12 per barrel also helped remove some of the concerns around the U.S. economy.
Higher energy prices stoke concerns of rising inflation across the board, reducing consumer spending power and stemming economic growth.