NEW YORK, March 22: The dollar rallied to its highest level in two months versus the euro and its best in three months against the yen on Friday as the US-led war against Iraq took a more aggressive turn.

The dollar soared to the day’s highs on reports Saddam Hussein may have been killed in the initial salvo against Baghdad in the wee hours of Iraq’s morning on Thursday. Officials later cast doubt on the reports.

By late afternoon in New York, the euro had lost 0.9 per cent to the dollar, trading at $1.0527, not far from session lows of $1.0502, its weakest since Jan. 15.

Against the safe-haven Swiss franc, the dollar was up more than 1.12 per cent at $1.4017 francs. It gained more than 1 per cent versus the yen to 121.55 yen.

The dollar has rallied nearly 5 per cent against the euro and Swiss franc since early last week, when it became clear that the United States was willing to go to war with Iraq soon, ending months of uncertainty.

In the nearly two days since the assault started, currency markets have been choppy, with the value of the dollar rising and falling depending on perceptions of how well the war was going for the United States and its allies. It ended the week little changed against the euro since Wednesday.

US blue chip stocks rose nearly 3 per cent on Friday on hopes for a quick war, while oil and gold prices slid.

But analysts cautioned that markets could turn quickly if there was a change of fortunes in the conflict.

What happens when allied forces get to Baghdad is the issue ... We will know more then how this war will progress, said CSFB’s Bonanca.

With the markets fixated on developments in Iraq, US inflation data was largely ignored. The Consumer Price Index rose 0.6 per cent in February, above economists’ expectations of a gain of 0.5 per cent. Excluding food and energy, prices rose just 0.1 per cent.

A 3.8 per cent surge in German factory orders in January due to strong demand for exports also failed to attract much interest. Analysts had predicted a rise of just 1.7 per cent.

Markets would also be attuned to a special meeting on Sunday between Bank of Japan’s Governor Toshihiko Fukui and Finance Minister Masajuro Shiokawa.

Marc Chandler, chief currency strategist at HSBC in New York, said the market was speculating that the two might agree on aggressive measures to boost money supply and even weaken the yen.

If they do not, he said, Monday could bring some buying back of yen for dollars.—Reuters