Take a look at the euro bull and the dollar bear

The euro has appreciated 2.5 per cent versus the yen and 1.5 per cent against the dollar since June 5, when ECB President Jean Claude-Trichet signalled that interest rates may have to rise next month to cap inflation. The yen fell against every major currency yesterday as Japanese importers sold the currency to take advantage of a rally versus the dollar late last week.

"The euro is gaining in the context of the rhetoric differential between the European Central Bank and the Fed [US Federal Reserve]," said Daragh Maher, a London-based currency strategist for Calyon, the investment-banking arm of Credit Agricole SA.

"The ECB is much more strident than the Fed, which has said it will stop easing [cutting rates]. That's very different from saying you're about to hike."

The euro rose to 166.45 yen in early London trade yesterday, from ¥165.54 last week. It strengthened to $1.5804, from $1.578. The yen dropped to 105.34 versus the dollar, from 104.93. The euro may advance to $1.60 by the end of the quarter, Maher said.

An interest-rate increase next month is "possible", Trichet said in Frankfurt last week. Inflation in the eurozone is running at the fastest pace in 16 years. The ECB will lift the key rate twice this year, taking it to 4.5 per cent by year-end, according to interest-rate futures trading.

"Unlike the Fed, the ECB can raise rates one or two more times due to the strength of the regional economy," said Tetsuhisa Hayashi, chief manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ in Tokyo. "I am a dollar bear".

Trichet will speak at a forum in Paris.

The ECB last week kept its main refinancing rate at a six-year high of 4 per cent, unchanged since last June.

The yen retreated on speculation that Japanese importers took advantage of the recent gain to settle their bills, said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, France's second-largest bank by market value. The yen may fall to 105.60 against the dollar, he said.

Trading volumes were less than usual as financial markets in Australia, China, Hong Kong and the Philippines were closed for public holidays, said Hayashi.