The dollar hit a nine-month high against the euro and an eight-month peak versus the yen on Monday, extending gains after last week's U.S. trade data and comments from Fed chief
Alan Greenspan (search) reinforced views of more interest rate hikes.

The euro fell to $1.2029, its lowest level since early September 2004, down 0.7 percent from late Friday. The dollar rose more than half a percent against the yen to a peak of 109.48 yen.

Analysts cited worsening euro sentiment, speculation that the European Central Bank (search) might acquiesce to a weaker euro and a sharpening market focus on the $1.20 mark; increasingly seen as a critical support area for the euro zone currency.

Since the French and Dutch rejected a proposed European Union (search) constitution two weeks ago, "the capitulation of long euro positions has continued to dominate. I don't see that backdrop has changed," said Todd Elmer, foreign exchange strategist with Barclays Capital in New York.

"Long" positions are essentially bets that a currency will strengthen.

Soft Japanese economic data on Monday also helped the dollar against the yen, supporting broad dollar strength, analysts said.

"Dollar/yen led the thrust of this dollar upmove and in part the market is responding to some bullish dollar technical signals," said Elmer.

Data showed the Japanese economy grew less briskly than originally estimated in the first three months of 2005, expanding by 1.2 percent compared to the original estimates of 1.3 percent.

Following last week's narrower-than-expected U.S. trade data and Greenspan's comments that the economy was on a "firm footing," the market is looking to see if this week's figures will reinforce expectations of at least two more U.S. rate hikes, analysts said. The trade data set some economists looking for stronger second quarter growth than previously thought, increasing the odds for more interest rate hikes this year.

There had been a flurry of speculation the week before of the possibility of only one more rate hike this year.

On the U.S. data slate for this week are reports on; producer prices, consumer prices, industrial production, net capital inflows and the U.S. current account deficit.

Finance ministers from the world's rich nations (G8) during their weekend meeting in London kept up pressure on China to move toward more flexible exchange rates, but produced no clues as to the timing.

Sticking to tradition, G8 did not mention currency issues in its communique as central bankers from the group did not attend the meetings.

Higher interest rates and the relatively lucrative yields on U.S. deposits have helped the dollar rise more than 10 percent against the euro so far this year.

More rate hikes are expected as soon as at the Federal Reserve's (search) next policy meeting on June 29-30. Another quarter-point hike then would be the Fed's ninth straight and it would take the funds rate to 3.25 percent.

In contrast, the euro zone's sluggish economy is raising expectations that the European Central Bank's next move may be an interest rate cut.

A weekend interview given by ECB Chief Economist Otmar Issing added fuel to these expectations after he said risks to price stability had decreased. The central bank has kept rates at 2 percent since June 2003.

Lara Rhame, foreign exchange strategist with Credit Suisse First Boston in New York cited factors helping the dollar rally on Monday included "lack of concerns about dollar strength," at the G8 meeting and "more clues that the ECB is welcoming of this trend."