The dollar jumped to a three-month high against the yen today after Federal Reserve Chairman Ben Bernanke said the central bank would strongly resist an erosion in inflation expectations.
Mr Bernanke also said the latest surge in energy prices is adding to the dangers from inflation and that the risk of a substantial downturn in the US economy has receded, sparking broad dollar gains and sending US bond yields soaring.
His remarks have convinced an increasing number of investors that rate hikes could come this year.
Such comments by the Fed chief, along with European Central Bank officials signalling that an interest rate increase could come as soon as next month, show top central bankers are trying to limit the inflation impact from oil spiking to near $140 a barrel.
The array of inflation-fighting comments from Mr Bernanke followed an unexpected barrage of remarks from US officials saying they are keeping an eye on the dollar while keeping open the option of dollar-buying intervention to stem its slide.
Earlier this morning, the dollar was up 0.3 per cent to 106.65 yen, having earlier hit a three month high of 106.83 yen. The euro was down 0.43 per cent at $1.5571, while the dollar was up 0.45 per cent against a basket of currencies to 73.209.
The dollar had already been lifted yesterday 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.
"Bernanke's the only thing moving markets. There's been a big shift in expectations towards . . . Fed rate hikes and this has lifted the dollar," said Adam Cole, global head of FX currency strategy at RBC Capital Markets.
The interest rate futures market is now pricing in 70 basis points worth of rises in U.S. rates from the current 2 percent by the end of the year.
Mr Bernanke took many people by surprise last week by saying a weaker dollar was adding to inflation risks - unusually blunt comments about the currency from a Fed chief, that stoked speculation about intervention.
Highlighting the sudden shift in expectations on the Fed policy outlook, the two-year U.S. Treasury yield soared as much as 25 basis points today to a high of 2.966 per cent - nearly a percentage point above the fed funds rate of 2 per cent.
The euro shot higher last week after Mr Trichet said a number of policymakers wanted higher rates and an increase from 4.0 percent was possible next month. He repeated the message yesterday.