NEW YORK, Oct 22: The dollar climbed on Friday as the market bought the currency ahead of the weekend based on expectations for higher US interest rates after an investment bank raised their target for the benchmark federal funds rate.

The dollar had gained ground for most of the week as a parade of Federal Reserve speakers pointed to inflationary pressures in the U.S. economy and vowed that the Fed would keep them at bay.

The comments reinforced expectations that the Fed would continue to raise rates, preserving or increasing the dollar’s yield advantage over other currencies.

I remain a steadfast dollar bull in the short term based on Fed policy and the widening of US interest rate spreads over those in some other major economies, said David Mozina, head of foreign exchange strategy with Lehman Brothers in New York.

On Friday, Lehman raised its forecast for the US rate hike cycle to peak with the federal funds rate at 4.75 per cent in March 2006, up from a previous 4.5 per cent forecast.

In late afternoon trading in New York, the euro was trading down 0.5 per cent at $1.1950 after hitting a peak of $1.2077 earlier in the session.

The euro had slid to a three-month low of $1.1876 on Wednesday.

Against the Japanese yen, the dollar was up 0.5 per cent at 115.86 yen and close to two-year peaks near 116 yen hit earlier in the week.

For the week, the dollar gained 1.6 per cent against the yen while the euro declined 1.1 per cent against the dollar.

But dealers and analysts cited mixed views on how much more of a lift the dollar can get from the yield play.—Reuters