LONDON, May 19: The dollar rallied on Friday against the euro and yen as the market focused on the prospect of further increases in US interest rates, dealers said.

The euro fell to $1.2738 in late European trading from $1.2857 late on Thursday in New York.

The dollar rose to 111.80 yen, from 110.82 yen late on Thursday.

Against the euro, the dollar was at an eight-day high, and against the yen at an 11-day high on growing expectations that inflation concerns might prompt the US Federal Reserve to raise interest rates again in June.

Stronger-than-expected core inflation data earlier this week and hawkish comments from officials on Thursday suggested that a hike at the next meeting of US rate-setters on June 29 may be forthcoming.

This marked a change from recent speculation that the Fed would pause next month before deciding whether to raise rates further.

“The market is beginning to expect another interest rate hike in the US and this has supported the dollar,” said Standard Chartered currency analyst Marios Maratheftis.

In itself, another 25 basis point hike would have little impact, but the shift in rate expectations has had a significant effect on sentiment, he said, adding that the market is pricing in around a 60 percent chance of a rise on June 29.

The dollar may continue to recover into next week, but sentiment towards the currency is unlikely to remain positive for long, he added.

On Thursday, Richmond Fed president Jeffrey Lacker was quoted as saying that the inflation outlook was “at the borderline of acceptable”, making a pause in rate hikes less likely.

Meanwhile, St Louis Fed president William Poole said the risks to inflation were “tilted to the upside” and a softening economy would not necessarily take away the inflation problem. He reiterated, however, that the Federal Reserve’s next rate decision would depend on upcoming data.

Elsewhere, the pound also suffered as a result of the dollar’s gains, falling to eight-day lows against the US currency.

Sterling rose against the euro, however, after solid British mortgage lending and M4 money supply data continued to suggest that the Bank of England would have to raise interest rates in the coming months.

On the London Bullion Market, the price of an ounce of gold dropped to $651.50 per ounce, from $693.50 late on Thursday.—AFP