The dollar climbed to one-month highs against the euro and two-and-half month peaks versus the yen as investors trimmed bearish bets on the greenback after key central bank meetings this week.
Comments by U.S. Treasury Secretary Henry Paulson that a strong dollar was in the interest of the United States, aired by CNBC, also helped the greenback's rally gather momentum, traders said.
Sentiment on the dollar had been negative for many weeks on concerns over the U.S. economy and expectations for higher interest rates in Europe and the UK, pushing bearish positions on the currency to stretched levels.
But the outcome of three central bank meetings from the Federal Reserve, Bank of England, and European Central Bank offered few surprises, giving dealers little incentive to further sell the dollar.
"Traders just seem to be paring some of their over-bearish positions on the dollar now that we are past this week's central bank meetings," said Mark Meadows, a currency analyst at Tempus Consulting in Washington.
"Some investors were expecting a more aggressive Bank of England and more hawkish commentaries by (Jean-Claude) Trichet, and since that didn't materialize, we are seeing a temporary reversal of the bets against the dollar."
The euro slipped as low as $1.3462.
Against the yen, the dollar was mixed after rising as high as 120.54 yen, the highest since late February, when a surge of risk aversion boosted the yen.
The dollar gained strength on Wednesday after the Fed said in its policy meeting statement that inflation remained the main concern despite recent signs of economic weakness. That
prompted some investors to pare back bets on the Fed cutting rates this year.
The euro showed little reaction after ECB President Trichet stressed the need for strong vigilance to ensure stable prices in the euro zone.
Trichet's use of the word vigilant usually precedes an interest rate increase, but the market had widely expected him to telegraph such a move in June. The ECB on Thursday held rates steady at 3.75%, as expected.
"Trichet basically said the market was right, that the ECB is going to hike in June to 4%. But he was not convincing on the outlook after 4%," said Tim Mazanec, director of foreign exchange at Investors Bank and Trust in Boston.
"This all gives us a sense that we're may be getting close to a top in the euro," he added.
Sterling also fell against the dollar . The Bank of England raised rates to 5.5%, also as forecast, but the accompanying statement neither promised nor ruled out further action going forward.
Analysts said with future UK rate hikes clearly dependent on the outcome of future data, the BoE statement was viewed as a modest disappointment by a market that has fully priced in another rate increase before year-end.
Earlier, the dollar edged lower after the U.S. trade deficit for March came in much wider than expected, raising worries about downward revisions to economic growth. But it recovered after Trichet's remarks.
"The March trade gap...will likely take a half-point out of the already low 1.3% first-quarter GDP figures," said Nigel Gault, chief U.S. economist at Global Insight in Lexington, Massachusetts.
The U.S. trade deficit rose to $63.89 billion from a revised trade gap of $57.89 billion in February. Markets were expecting a trade shortfall of $60 billion.