The dollar climbed on Wednesday, particularly against the Australian and New Zealand dollars, after traders used bearish economic reports on those countries as excuses to take profits on recent strength.
The New Zealand dollar, also known as the kiwi, added to deep losses after the country's central bank raised interest rates, as expected, but gave few signs that more tightening is in store.
"The market perception that the comments were a little less hawkish than what some anticipated is putting pressure on the kiwi," said a dealer with an Australian bank.
The New Zealand dollar had its worst single-day loss against the US dollar in well over a year, plummeting over 2 percent from late Tuesday to US $0.7006. The Australian dollar had its best one-day gain against the kiwi in four years, rising 1.6 percent to NZ$1.0659.
Prior to Wednesday's sell-off, the kiwi had gained almost four cents in the past month, benefiting from the highest interest rates among G10 currencies.
"Whenever you have negative news, people are going to dump (the kiwi) on the view that it might be the start of a downward move," the dealer said.
The Reserve Bank of New Zealand lifted its base rate to 7.25 percent, but said further tightening will depend on the extent to which the solid housing sector and domestic spending moderate in the coming months.
Price action in the antipodean currencies stood out amid an otherwise quiet trading session, void of market-moving economic data or news.
"Most of the (US) dollar's gains are based on the sell-off in the Australian and New Zealand dollars," said John McCarthy, director of foreign exchange at ING Capital Markets in New York.
The Australian dollar dropped to US $0.7478, down 0.7 percent from late Tuesday.
The euro, fell 0.5 percent to $1.1722, remaining within its range of roughly $1.1640 to $1.1900 for the past month. Against the Swiss franc, the dollar rose 0.6 percent to 1.3132 francs. Sterling fell 0.3 percent to $1.7353.
The New Zealand dollar's plunge was fuelled by a warning from credit rating agency Standard and Poor's that the country's widening current account deficit poses a risk to its sovereign debt rating.
A recommendation by investment bank Goldman Sachs to sell the currency ahead of an expected New Zealand slowdown completed a double whammy of bearish reports on the kiwi and spurred the sell-off.
The Australian dollar posted losses after softer-than-expected economic growth data cemented expectations for rates there to stay on hold. Australia left rates unchanged at 5.5 percent on Wednesday, as expected.
Against the yen, the US dollar edged back toward a 32-month high of 121.40 yen. By midday, the dollar stood at 120.95 yen, up 0.1 percent on the day.
"We start to get into sticky territory between 122 and 125 yen (the range in 2002-2003), although the market doesn't seem to have any momentum right now to get to those levels," said John Beerling, chief dealer at Wells Fargo in Minneapolis.
The euro eased from Tuesday's record peak of 142.82 yen to 141.85, down about 0.4 percent on the day.