The dollar rallied toward the strongest level against the euro in more than a decade after a report showed U.S. inflation may be closer to rebounding, giving the Federal Reserve scope to raise interest rates.

The U.S. currency gained versus most of its major peers as a higher-than-forecast increase in so-called core inflation, which excludes food and fuel, offset concern that overall consumer prices tumbled last month. Fed Chair Janet Yellen told Congress this week that short-term declines in inflation are linked to the plunge in crude-oil prices and are likely to prove temporary.

“Everyone had pre-positioned for a pretty weak CPI,” said Matt Derr, a foreign-exchange strategist in New York at Credit Suisse Group AG. “Even if it wasn’t a huge surprise, it was enough to get that unwound. Things moved pretty aggressively after Yellen’s testimony.”

The dollar surged 1.4 percent to $1.1198 per euro as of 5 p.m. New York time, touching almost the strongest level since 2003. The greenback added 0.5 percent to 119.41 yen.

The greenback’s allure is helped by Treasury 10-year note yields that exceed similar maturity securities issued by 19 other developed nations, according to data compiled by Bloomberg.

Inflation Pace

The U.S. consumer-price index excluding volatile food and fuel, the so-called core measure rose 0.2 percent in January, more than projected. Overall inflation declined 0.7 percent, the most since December 2008, a Labor Department report showed.

“Headline is known information, but core measure surprised to the upside,” Daniel Brehon, a New York-based strategist at Deutsche Bank AG, said in a phone interview. “Given that inflation surprises have been negative around the world, anything above consensus is a sign for optimism and a sign for higher rates in the U.S.”

Yellen, in testimony to the Senate Banking committee this week, said inflation will rise gradually toward the Fed’s 2 percent annual target. The central bank has held its target for the federal funds rate at virtually zero since 2008.

Hedge funds and other large speculators cut net long positions, or bullish bets, on the dollar versus eight of its major peers last week, according to data from the Washington- based Commodity Futures Trading Commission. Wagers on a rising dollar outnumbered bearish positions as of Feb. 17 by 407,386, the lowest in almost two months.

Bullish Positions

“What it comes down to is the market capturing opportunities to enter long-dollar positions, that’s really why we’re seeing a resurgence in dollar strength.” Lennon Sweeting, a Toronto-based dealer at the broker and payment provider USForex Inc., said in a telephone interview.

The dollar was the best performer among 10 developed-nation peers in the past 12 months, with the Fed moving closer to raising interest rates while central banks around the globe boost monetary stimulus to try and revive economic growth. The U.S. currency has gained 16.3 percent against the basket of currencies, according to Bloomberg Correlation-Weighted Indexes. The euro dropped 7.1 percent and the yen declined 2.2 percent.

The euro has weakened 7.4 percent versus the dollar this year as the European Central Bank plans to start next month buying unlimited amount of bonds to stave off deflation.