NEW YORK: The dollar approached a 4-1/2-year high against a basket of currencies on Monday as traders speculated that overseas central banks would further ease monetary policies to help their economies, even though it would erode their currencies.
China might be ready to lower interest rate again after Friday's surprise rate cut in an effort to stem deflation, sources familiar with its policymaking told Reuters.
On Friday, Mario Draghi, the European Central Bank chief, threw the door open for more drastic measures as he stressed that "excessively low" inflation had to be raised fast. That sent the euro down over 1.2 percent, its biggest daily drop in 2-1/2 months.
As China, Europe and Japan were seen likely pursuing further policy easing, the US Federal Reserve was expected to normalize rates next year.
"With the Fed leaning in the other direction, the trend remains higher for the dollar," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida.
The dollar index, which measures its value against a basket of six currencies, touched 88.440, its highest since June 2010, before easing to 88.198, down 0.1 percent from late Friday.
It turned negative when the euro firmed against the dollar after a stronger-than-expected German business survey in November offered hope that Europe's largest economy was gaining momentum after narrowly avoiding a recession last quarter.
The euro gained 0.2 percent to trade at $1.2417 after trading as low as $1.2359, within a whisker of a two-year low hit earlier in the month.
The dollar gained 0.4 percent against the yen to 118.34 yen.
It hit a seven-year high of 118.98 yen last week after Prime Minister Shinzo Abe called a snap election and delayed a planned sales tax hike.
The Swiss franc was weaker against the euro at 1.2025 francs , easing from a 26-month high last week.
UBS strategists said data showing the amount of cash that commercial banks hold with the Swiss National Bank surged last week, confirming their view the SNB may have intervened to defend its peg of 1.20 francs per euro last week.
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