The euro rose to another 16-month high against the dollar Tuesday as traders awaited a key announcement from the Federal Reserve and comments from Fed Chairman Ben Bernanke that could shake perceptions of the direction of U.S. interest rates.
Higher interest rates tend to support a currency's value, because they give investors bigger returns. The Fed has kept its key rate near zero since December 2008 and launched a $600 billion bond-buying program to keep rates low. Many analysts expect that the Fed will keep rates low for a long time despite rising gas and food prices.
Central banks overseas have already begun raising rates to combat inflation. The difference between the benchmark U.S. rate, which many investors expect the Fed to keep near zero, and rising rates abroad have helped drive the dollar 6.5 percent lower this year against a basket of six major currencies. That measure hit its lowest level since August 2008 on Tuesday.
Still, Treasury Secretary Timothy Geithner fought back criticism that the Fed's policies have weakened the dollar, giving a boost to U.S. exports. A weaker currency makes U.S. goods cheaper than those of countries with stronger currencies.
"I want to make it clear that our policy has been and will always be...that a strong dollar is in the interests of our country," Geithner said in remarks Tuesday to the Council on Foreign Relations in New York. "We will never embrace a strategy of trying to weaken our currency to gain economic advantage at the economic expense of our trading partners."
The Fed began a two-day meeting Tuesday. Bernanke's statements on Wednesday _ the first-ever scheduled press conference by a Fed chief after an interest-rate policy meeting _ will be studied for hints on when the Fed could change its low rate policy. The $600 billion bond buyback program is set to expire in June.
Any "hawkish" language from Bernanke on Wednesday, such as a hint at when the bank might adjust its policies, could boost the dollar, said Win Thin, currency strategist at Brown Brothers Harriman in New York. A hawkish central banker tends to be more concerned with inflation and would be more likely to raise interest rates to counter rising prices. Thin doesn't expect any such statement from the Fed chief. Bernanke has said the recent increase in oil and food prices will likely have only a temporary, mild effect on broader inflation.
The euro rose to $1.4632 late Tuesday from $1.4585 late Monday after earlier peaking at $1.4657. The dollar dipped to 81.63 Japanese yen from 82.24 yen, but the British pound dropped to $1.6475 from $1.6505.
The dollar also hit its most recent record low against the Swiss franc and fell to a more than 27-year low against the Australian dollar. The Australian dollar, which began trading freely in December 1983, shot up this year as commodity prices rose. Australia is a major exporter of raw materials and its currency tends to benefit when commodity prices climb.
The Canadian currency has likewise gained from the surge in commodity prices, climbing 4.5 percent against the dollar this year. The dollar slipped Tuesday to 95.31 Canadian cents from 95.44 Canadian cents.
AP Business Writer Pallavi Gogoi in New York contributed to this report.