The yen sank to an all-time low against the euro and hit multi-year troughs versus a host of high-yielding currencies on Tuesday as investors eyed the yawning interest rate gap between Japan and other nations.
The yen hit a fresh 13-year low versus the Canadian dollar, an 8-1/2 year low against the Australian dollar and a 7-year trough versus sterling. It stayed near an 8-1/2 year low against the New Zealand dollar and was within sight of a fresh 32-month nadir versus the US dollar.
Interest rates in Canada and New Zealand, already at a large premium over Japan's virtually zero rate, are set to rise further this week, putting extra pressure on the yen.
"The yen selling structure remains intact," said a trader at a Japanese trust bank. "The pounding the yen is taking from high-yielding currencies could drive the dollar and the euro up to fresh highs against the Japanese currency."
The Bank of Canada is widely expected to raise its rate to 3.25 percent from the current 3 percent later in the session.
Later in the week, New Zealand's central bank is expected to lift its key rate to 7.25 percent from the present 7 percent - already the highest among the industrialised countries.
Australia is seen keeping its rate unchanged on Wednesday, although it is already at 5.5 percent, appealing to Japanese looking for a better return than that offered at home.
The Bank of Japan is expected to keep rates close to zero even if deflation ends next year and prompts the central bank to scrap its ultra-loose policy. Some analysts say the BOJ may not raise rates until well into 2007.
The dollar was buying around 120.95 yen. That was up slightly from around 120.80 yen in late US trade and in sight of Monday's high of 121.40 yen on electronic trading platform EBS, the highest since March 2003. The euro was around 142.60 yen, slipping from a peak of 142.74 yen struck earlier in the session - its highest since the single currency was launched in 1999.
The euro was fetching around $1.1790, little changed from late US trade on Monday, when it hit a session high of $1.1820. Traders said support remained at $1.1640, the two-year low hit last month.
The dollar has been supported by expectations for rising US rates, US companies repatriating funds to take advantage of a year-long tax break that expires at the end of December and Japanese investors investing year-end bonuses in foreign assets.
The Federal Reserve is widely expected to bump up the fed funds rate for a 13th straight time to 4.25 percent at its policy meeting next week, and many analysts and traders forecast another rate increase in January.