The dollar rose on Friday as remarks by Federal Reserve policymakers helped boost investor expectations of a near-term increase in U.S. interest rates.
Boston Fed President Eric Rosengren said in a speech on Friday that gradual interest rate increases might be in order with the U.S. economy at full employment and that low interest rates were increasing the chance of an overheated economy.
Rosengren's comments followed the announcement Thursday that U.S. Fed Governor Lael Brainard would give a speech on Monday.
Brainard is considered one of the Fed's more dovish members, meaning she is more inclined to leave rates lower in order to strengthen employment. The announcement of her speech likely means she will deliver the message that the Fed is close to raising rates, analysts said, suggesting there may be consensus on the rate-setting Federal Open Market Committee (FOMC) to do so.
Brainard and Rosengren are both voting members on the FOMC, which sets the target for U.S. short-term rates.
"Despite the relatively weak economic (data) that we've had this month, the market decided that it appears central bank officials are no longer enamored with zero-interest-rate policy; they really want to normalize rate policy sooner rather than later," said Boris Schlossberg, managing director of FX strategy at BK Asset Management.
Fed funds futures prices showed traders had raised their bets on a rate increase this year. CME Group's FedWatch shows investors see a 30 percent chance of a rate increase at September's FOMC meeting and a 60 percent chance of a hike in December.
The increased bets on a rate increase raised U.S. Treasury debt yields, which was bullish for the dollar, analysts said. U.S. benchmark 10-year Treasury notes touched their highest level in more than two months on Friday.
Higher Treasury yields boost U.S. interest rates, which makes the dollar more attractive for investors to hold.
The dollar index, which tracks the U.S. currency against a basket of six currencies, rose 0.34 percent to 95.35.
The euro fell 0.36 percent against the dollar to $1.1226, pressured lower by a report on German exports that showed the steepest drop in nearly a year.
Commodity-linked currencies were battered by the dollar as traders unwound carry trade positions in higher-yielding currencies like the and New Zealand dollars, BK's Schlossberg said.