The dollar hit a five-week high against a currency basket on Monday, extending its rally from Friday when strong U.S. jobs data fueled speculation the Federal Reserve may consider winding down its stimulus measures.
Against the euro, the dollar rallied to its highest in more than a month after the data showing a much smaller-than-expected loss of U.S. jobs sparked anticipation the world's biggest economy was recovering from recession.
The market is pricing in more concrete evidence that the Fed will start normalizing policy, said Geoffrey Yu, currency strategist at UBS in London.
While the Fed is not in a position to start being hawkish on policy, it may start being less dovish.
The dollar index .DXY, which tracks the U.S. currency's performance against a currency basket, rallied as high as 76.183, its strongest since early November. By 1058 GMT, it was 0.1 percent higher at 75.971.
The U.S. currency extended its rally which saw it rise 1.7 percent on Friday, its best one-day performance in a year, after the data showed the United States shed 11,000 jobs in November, confounding forecasts for 130,000 job losses.
The euro was down 0.2 percent on the day at $1.4815. In earlier trade it fell to $1.4755, its weakest since November 4.
Market participants said euro losses were limited as traders suspected stop-loss orders around $1.4750. Some analysts said the slide in the single European currency was providing a good opportunity to buy on dips.
Despite its broad gains, the dollar was down nearly half a percent at around 90.00 yen, although it stayed in range of a one-month high of 90.78 yen hit after the jobs data.
The U.S. currency remains well above a 14-year trough of 84.82 yen marked in late November on trading platform EBS.
Many in the market say the dollar's strong performance was also due to massive unwinding of short dollar positions as the year-end nears.
Some analysts see more room for such unwinding after speculators increased bets versus the dollar in the week ended December 1 to the most since at least June 2008, CFTC data showed on Friday.
Despite the dollar's latest rally, some analysts said one strong jobs report would do little to shift the view of the Fed, which meets next week, and expectations rates will stay low for some time may limit any lasting upside in the U.S. currency.
John Hydeskov, senior currency analyst at Danske Markets in Copenhagen, said the Fed was unlikely to change significantly its pledge to keep rates low for an extended period, which may disappoint dollar bulls.
Traders will look for hints on the Fed's view of the economy and rates when Fed Chairman Ben Bernanke and New York Fed President William Dudley speak later on Monday.
From a fundamental perspective, the focus will now be on whether the strong (jobs) data lead to any shift in the Fed's policy outlook, starting with speeches by Bernanke and Dudley today, analysts at Barclays said in a research note.
A Reuters poll showed on Friday that dealers' expectations for when the Fed will raise its benchmark interest rate ranged from the second quarter of 2010 to 2012. Most saw the central bank hiking rates by the end of Q1 2011.
The dollar has taken a beating for much of the year on the view that rates in the United States will stay low while those elsewhere rise. This would increase the yield advantage of other currencies against the dollar.