The low-yielding yen was mired near a record low against the euro and a 4-1/2 year trough versus the dollar on Wednesday, while sterling rose across the board after surprisingly hawkish Bank of England minutes.
With the focus on interest rate differentials, the Swedish crown jumped more than one percent versus the euro after the Riksbank raised rates to 3.5 percent and revised up its forecast for future rates by more than expected.
Investors remained comfortable with using the low-yielding yen to buy higher-return assets. The carry trade theme was also reflected in high-yielding Australian and New Zealand dollars, hitting 16- and 20-year peaks respectively versus the yen. Sterling, another carry trade target with interest rates of 5.5 percent, hit a fresh 15-year peak versus the yen after minutes from the BoE's latest rate-setting meeting led some investors to believe British borrowing costs could rise as early as July.
"We have seen renewed stabilisation of equity markets today. Risk appetite is back in the market, and the carry trade in the yen is well supported for the time being," said Niels From, currency strategist at Dresdner Kleinwort in Frankfurt.
"The minutes from the Bank of England are also supportive in general for the carry trade, with the sterling being one of the high yielders," he added. By 1118 GMT, the dollar up 0.15 percent at 123.53 yen, moving back towards the 4-1/2 year peak of 123.75 hit earlier this week, according to Reuters data. The euro ticked up to 165.90 yen, only about 20 ticks away from a record high hit on Tuesday.
The yen has slid since Bank of Japan Governor Toshihiko Fukui said last Friday the BOJ wanted to confirm the sustainability of capital and consumer spending, erasing some speculation of a move as soon as July to 0.75 percent from the current 0.50 percent.The euro was steady at $1.3428, having rebounded from an 11-week low of $1.3262 touched last week.
Interest rate hawks in Britain got a boost after Bank of England minutes showed that four policymakers - including Governor Mervyn King - had dissented from this month's on-hold decision by voting in favour of a hike.
Investors had expected a more cautious 7-2 split. "It is hawkish, it does mean that the market will start to discount a rate hike at the next meeting, and that is very supportive of sterling," said Ian Gunner, head of foreign exchange research at Mellon Financial Corporation.
Sterling rose to a two-week high of $1.9934, moving back towards 26-year peaks above $2 set back in April. Against the yen it hit a fresh 15-year peak of 246.16 yen. The Swedish crown was on track for its biggest one-day gain versus the euro in nearly five years, after the Riksbank upped its forecast for average rates in the fourth quarter to 3.9 percent from 3.5 percent previously. Analysts were looking for a smaller upward revision, to around 3.75 percent.
The Swiss franc also strengthened against the euro after producer and import price inflation in May was much higher than expected. The dollar has slipped versus the euro in the past three sessions as a rebound in Treasuries from their sharp sell-off pulled benchmark US yields down from a five-year high, which had given the US currency a boost.
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