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HONG KONG - The dollar extended a squeeze higher on Friday, reaching a new near two-year peak against a basket of peers and a one-month high versus the euro, supported by the prospect of a more aggressive pace of Federal Reserve interest rates hikes.

The dollar index rose as high as 99.904 in early Asia trade, its best level since May 2020.

The index is up 1.2% this week, which would be its biggest advance in one month, backed by hawkish remarks from several Federal Reserve policy makers who are calling for a faster pace of interest rate increases to curb rapid inflation.

This week's release of the minutes of the Fed's March meeting showed "many" participants were prepared to raise interest rates in 50-basis-point increments in coming months

"Recent gains in the dollar index seem fairly sustainable over the remainder of the month as markets settle on the idea of a much more aggressive Federal Reserve in Q2," said Simon Harvey, head of FX analysis at MonFX

"However, we believe further upside in the dollar is unlikely without a recalibration of the Fed’s terminal rate in markets. This is largely due to the limited upside in current Fed pricing based upon current fundamentals."

On the other side of the dollar's rally, the euro dropped to a new one-month low of $1.0856 in early trade on Friday, hurt by new Western sanctions on Russia, with the European Union moving towards a ban on Russian coal set to take effect from August.

The European Central Bank is also grappling with inflation but "while ECB members have sounded relatively hawkish to the recent inflation shock, providing EUR/USD with a modicum of support around the 1.09 handle, sustained pressure from European energy prices and calls for further sanctions on Russian energy exports to the eurozone suggest further declines in EUR/USD are likely," said Harvey.

The common currency has also been dragged down by uncertainty around the outcome of the French election, as far-right candidate Marine Le Pen gains in the polls threatening the re-election hopes of incumbent Emmanuel Macron. Polls still show Macron ahead though.

The dollar extended its gains against the Japanese yen, rising to as much as 124.23, its highest in over a week and testing last month's near seven-year high of 125.1.

The yen has steadied this month after tumbling in March, but remains under pressure as the U.S. raises interest rates and the Bank of Japan is intervening in the bond market to keep rates low.

Slightly lower oil and other commodity prices saw commodity currencies like the Australian and Canadian dollars take a breather after gaining strongly in recent weeks.

Sterling was at the low end of its recent range at $1.30695.

In cryptocurrency markets, bitcoin was trading around $43,300 just off its overnight two-week low of $42,742.