The dollar soared Friday, hitting its highest levels in a month against the euro (search) and climbing more than 1 percent against other major currencies on a shifting interest rate outlook and growing expectations of a U.S. economic rebound.

Traders began to pay more attention to a long-running theme that has until now afforded the dollar little help; the economic growth differential between the United States and the more lackluster euro zone economy (search).

"The trade which everyone had in the first half of the year is winding down, which is long European bonds and long euros," said Marc Chandler, chief currency strategist with HSBC in New York. "Most people believe that (the U.S.) is in a slow recovery period," he said.

Another major element pushing the dollar into new, higher ranges was a shift in market expectations as traders became warier of betting on a deep 50 basis points rate cut at the Federal Reserve's policy-setting meeting on Wednesday.

A Reuters survey of the dealers who trade directly with the Fed showed a deep division over how aggressive the Fed will be. The poll, conducted Friday, found the camp expecting a 50 basis points cut edging out those who see a smaller 25 basis points move by 12 to nine.

Analysts expect that any reduction in interest rates will be supportive of growth in the world's largest economy, eventually helping the dollar even as the yield differential between assets of the United States and their higher-returning European counterparts widens.

As market participants' view of the Fed outlook became more finely balanced, that helped push the euro down into what some saw as a new, lower trading area against the dollar that could hold for the near term.

"Now we are going to see if (the euro is) going to make a new trend, and a lot of people believe that. The euro was in that $1.16 to $1.19 band for so long, and for whatever reason, we are out of it," said Cyrus Whitney, head dealer with Commerzbank in New York.

Over the medium term, however, some analysts believe more monetary easing stoking faster U.S. economic growth may not allow the dollar to shrug off a millstone around its neck: the wide U.S. current account deficit, currently around 5 percent of gross domestic product.

"The dollar might have been oversold and we might be in a consolidation phase. The euro is not likely to get out of this $1.15 to $1.20 trading range" over the near term, said Michael Rosenberg, global head of foreign exchange research at Deutsche Bank in New York.

But he added: "It is not going to matter much whether the Fed funds rate goes to 75 basis points or 1 percent: U.S. rates are simply too low to finance that massive deficit. That's why I still believe the dollar is on a downward trajectory."

Late Friday afternoon in New York, the euro was at $1.1605 against the dollar, down 0.98 percent on the day. Against the Japanese currency, the dollar was at 118.34 yen , flat on the session. Against the Swiss franc, the dollar was at 1.3286 francs, up 1.1 percent on the day.

This week's U.S. data have painted a constructive picture of the economy, though most analysts expect the central bank to ease monetary policy as "insurance" against deflation and further economic weakness.

An interesting twist in the current divide is how much attention the central bank has generated. Competing articles this week in the Washington Post and the Wall Street Journal have given the Fed an air of celebrity usually reserved for the likes of politicians.

On Thursday, a Post article argued that a 50-basis-point cut was most likely. But the Journal's piece countered that speculation by quoting unidentified Fed officials as saying a 25-basis-point cut had not been ruled out.