Euro hovers above USD 1.35, near all-time high, pound approached US2

The euro maintained its upward march against the U.S. dollar on Monday, climbing to less than one U.S. cent shy of its all-time high before settling back at more than US$1.35 in European trading.

Meanwhile the British pound edged closer to US$2, a significant psychological barrier, analysts said, rising to US$1.9908.

The 13-nation euro bought US$1.3546 in morning trading after climbing as high as US$1.3576 earlier in the session - its highest levels since January 2005 and less than a penny short of its all-time high from December 2004 of US$1.3667.

That compared with the US$1.3539 the euro bought on late Friday in New York after data showed that U.S. wholesale prices increased by 1 percent in March, but with volatile energy and food prices removed, other prices were flat. Evidence that inflation hasn't spread through a wider range of goods might relieve pressure on the Fed to raise rates.

The euro has charged higher against the dollar in recent months as the 13-nation euro zone's economy continues to improve and jobless figures to decline. But the rising euro has also drawn criticism because it causes the prices of exports to rise.

The euro reached its two-year high last week after the European Central Bank left its benchmark rate unchanged at 3.75 percent but appeared to set the scene for an increase to 4 percent in June.

That would be aimed at countering threats of inflation in the euro zone, a bloc of 317 million people that accounts for more than 15 percent of the world's global domestic product.

Higher interest rates, used to combat inflation, can bolster a currency by making certain types of investments more attractive.

The U.S. Federal Reserve has left rates unchanged over recent months even as the ECB steadily increased the cost of borrowing. U.S. data have been watched closely for pointers as to the Fed's future course.

Worries about the U.S. trade and budget deficits were a key factor in the euro's surge to its all-time high in 2004, but those worries were submerged over the past two years by the Fed's campaign of interest rate increases.

The dollar also lost ground against the British pound, which broke through US$1.99 before settling back to US$1.9872 compared with US$1.9870 on Friday, after the government said prices on home sales and manufactured items were up 2.7 percent in March compared with a year ago.

"Clearly many are eyeing a test of the key US$2 level, something that hasn't been seen since 1992," said David Jones, chief market analyst for CMC Markets in London.

The dollar rose to 119.44 Japanese yen from 119.06 yen after members of the Group of Seven did not press Japan to raise its own interest rates to buoy its currency.