The dollar rose against the euro and yen in Asia Tuesday on safe haven demand as concerns over a possible Chinese rate hike sapped risk appetite, dealers said.
The greenback was also buoyed by speculation of increased fund inflows back to the United States, dealers said, following a report about a corporate tax holiday on the foreign profits of US firms.
The euro sagged to $1.4461 in Tokyo trade from $1.4524 in London late Monday. The European single currency was almost flat at 117.32 yen against 117.30 yen.
The dollar gained to 81.06 yen from 80.77 yen.
The People's Bank of China said in a statement Monday that inflationary pressures "are still high" while the economy continues to grow at a steady and relatively fast pace.
Two local papers on Tuesday interpreted the PBoC statement to mean that a hike in interest rates could be imminent.
A Moody's Investors Service report on Tuesday that said Chinese banks may be facing bigger problems with municipal loans also put downward pressure on the euro, dealers said, as investors opted for safer plays.
"The currency market was overly optimistic last week and a correction is now taking place after these reports," Kuniyuki Hirai, a manager at the foreign exchange trading department at Bank of Tokyo-Mitsubishi UFJ, said.
A Bloomberg report said a reduction in income tax on repatriated profits being debated by Congress could lead to as much as $700 billion in flows back to US, also contributing to the dollar's strength, said dealers.
"The dollar was broadly bought against other major currencies in the wake of a the report," Tomohiro Ishikawa, dealer at Chuo Mitsui Trust and Banking, told AFP.
"The report raised speculation about future fund flows back to the United States," another dealer at a Japanese bank said.
The US market was closed Monday for the July 4 Independence Day holiday.
The single European currency had earlier held firm despite a warning on Greece's debt from ratings agency Standard & Poor's that cast a shadow over recent progress in the debt crisis.
Markets were looking head to the European Central Bank policy meeting Thursday, at which the ECB is expected to raise interest rates for the second time this year, by 0.25 percentage points to 1.5 percent in a bid to curb inflation, dealers said.
The dollar has been supported against the yen by positive sentiment on the back of recent gains in US Treasury yields and a rally in the stock market, a trust bank trader told Dow Jones Newswires.
The dollar gained against other Asian currencies, to Sg$1.2271 from Sg$1.2254 on Monday, to 1,066.15 South Korean won from 1,063.78 and to Tw$28.78 from Tw$28.67.
It also gained to 8,536.75 Indonesian rupiah from 8,521.50, to 43.09 Philippine pesos from 43.06 and to 30.49 Thai baht from 30.47.