The dollar jumped to a 27-month high against the yen and a two-year peak versus the euro on Tuesday as its relentless rally on a upbeat US interest outlook continued.
The euro was also weighed by an unexpected dip in German investor sentiment, which wiped out the impact of strong euro zone growth data, and uncertainty over whether the European Central Bank is poised to hike rates next month.
The Federal Reserve's 16-month credit tightening campaign, taking interest rates to 4 percent from 1 percent, has drawn more investors to the dollar and US bonds. Several economists see overnight rates rising to at least 4.5 percent next year.
In contrast, pointed criticism from Japanese government officials this week has given market players more reason to think the Bank of Japan will be cautious about lifting rates from virtually zero, which has hobbled the yen this year.
The yen came under renewed pressure on Monday after Japanese Prime Minister Junichiro Koizumi made a rare comment on central bank policy, saying it was too early for the Bank of Japan to end its ultra-loose policy, which should be maintained until deflation was defeated.
"The dollar is picking up steam pretty much across the board - on dollar/yen it looks like we're going to be heading up to the 120 area, that's the next target ," Ian Stannard, senior foreign exchange strategist at BNP Paribas, said.
By 1249 GMT, the dollar was up half a percent at 119.35 yen, having hit a 27-month high of 119.42. Traders said a major options barrier had been smashed at 119.00.
"In a very yield-fixated environment, Japanese yen offers nothing," Daragh Maher, senior currency strategist at Calyon, said.
The euro was down a third of a percent at $1.1651 against the dollar, having slid to a two-year low of $1.1641.
Sterling fell to a four-month low of $1.7305, also hurt by soft British inflation data earlier in the session, while the dollar hit a 19-month high against the Swiss franc at 1.3242 francs.
Rising speculation that the ECB was ready to hike rates from a historic low of 2 percent as early as December has offered only scant relief to the euro, which has lost around 14 percent this year against the dollar.
The euro extended its losses after euro zone central bankers told Reuters that the ECB is divided over the urgency of raising interest rates, and policymakers preferring an early hike have not yet won enough support for a December move.
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