The dollar hit a 14-month high against the yen on Wednesday as expectations grew that Federal Reserve chief Alan Greenspan will signal steady increases in US interest rates in Congressional testimony later in the day. Sterling fell a full US cent at one stage after minutes from the Bank of England's meeting showed 4 out of 9 policy-setting members voted for an interest rate cut, up from 2 a month ago, cementing expectations for an August rate cut.
Investors expect the Fed chief's semi-annual testimony before Congress, starting at 1400 GMT, to echo his comments earlier this week that the US economy is set to expand at a moderate pace despite rising oil prices.
"The trend is dollar buying ahead of Greenspan's testimony stemming from the difference in economic fundamentals and widening interest rate differentials," said Hiroshi Morioka, head of foreign exchange at Bank of Tokyo-Mitsubishi in London.
"The BoE vote was surprising but an August rate cut is a done deal. The key is what happens after August and the opinion is divided as to whether they would continue cutting rates."
By 1130 GMT, the dollar was up 0.3 percent on the day at 112.98 yen having hit a 14-month high of 113.18 earlier.
The euro hit a 2-1/2 month high at 136.76 yen and rose 0.4 percent to $1.2080, with the single currency also being driven by its march higher against the crosses such as sterling and the Swiss franc.
Sterling hit a four-month low of 69.67 pence per euro while it fell 0.3 percent on the day to $1.7323, its weakest in more than a week, before trimming losses.
With interest rates expected to fall elsewhere, the United States is one of the few major economies tightening monetary policy this year, which is spurring dollar buying. The Fed has raised the benchmark rate on 9 occasions since June 2004 to 3.25 percent and rates are seen reaching 4 percent by end-2005.
Eurozone rates have limped along at 2 percent for two years, while Japanese rates have been stuck near zero for even longer.
Analysts said political risk was also a factor behind the yen's independent weakness ahead of a vote next month on controversial postal system reform in Japan - a key pillar in Prime Minister Junichiro Koizumi's reform policies. Koizumi could dissolve Japan's lower house if the bill is voted down.
"More and more people have started to talk about it but it's easy to blame political uncertainty when the yen is being sold," Morioka said.