The government’s efforts to support the buck are obviously bearing fruit, as the currency posted its best one-week gain vs. the euro since August 2003.

The dollar got another boost when the Labor Department said that U.S. consumer prices rose 0.6% in May, the most in six months. Economists had been projecting only a 0.5% gain. Core CPI, excluding energy and food for those who neither drive nor eat, was up 0.2%, in line with expectations.

The hefty CPI growth raises the spectre of inflation, which could cause the Fed to raise interest rates, which benefits the US currency.

Meanwhile, consumers continue to grow gloomier. The consumer-sentiment index fell to 56.7 from 59.8 in May, according to the University of Michigan/Reuters.

More important for the buck, “The market believes the Fed has changed its focus,” said Marc Chandler, of Brown Brothers Harriman. “It’s no longer concerned about risks for the financial system or downside risks for the economy, but about inflation. It’s encouraging people to adjust positions in favor of the dollar.”

Market watchers are keeping a close eye on Osaka, Japan, where finance ministers from the G8 nations — Canada, France, Germany, Great Britain, Italy, Japan, Russia and the United States — are meeting, with inflation on their agenda.

Source: Dollar Rallies Again