The dollar is surging in a volatile session, wiping out earlier losses as traders interpreted the U.S. Treasury secretary's comments on the Chinese yuan as being more supportive for the dollar.
Treasury Secretary Henry Paulson said in an interview on CNBC that China needs more foreign exchange flexibility, but declined to identify an amount by which the Chinese currency should appreciate.
"My take on Paulson is that his comments were very harsh and his message to China is clear that they have to get into gear (on imbalances)," said Matt Kassel, vice president of FX at ING Financial in New York.
Traders also mentioned speculation the European Central Bank was in the markets checking the level of the euro, which may have contributed to gains in the dollar.
European Central Bank officials declined to comment.
The euro erased earlier gains and is on course for its largest daily drop in two months.
The dollar hit New York session highs against the yen at 116.51 yen.