The dollar sank to a record low against the euro and a multi-year trough versus a basket of major currencies on Thursday, weighed by concerns that wobbles in US mortgage and credit markets could spread to the wider economy.
Worries about US subprime mortgage lending seemed to abate slightly in other markets, as European stocks, government bonds and some credit spreads stabilised.
"People will remain nervous although I'm surprised this (subprime issue) has stayed a US-centric problem, with the only net result for the dollar to sell off," said ING head of currency strategy Chris Turner. "If we do see de-leveraging with higher volatility then some of the higher-yielders should come off."
The yen took advantage of the dollar's malaise after the Bank of Japan left interest rates at 0.5 percent, as expected. Broader yen gains were short-lived, however, with the ultra-low yielding currency sliding to record lows versus the euro as investors remained sceptical about the chances of an August BoJ rate increase.
Analysts had expressed surprise at the yen's initial rebound as BoJ policymakers voted 8-1 to keep rates on hold, a sign that monetary tightening may be at least a couple of months away.
"It's been a market of weak dollar and weak yen, but if the market focuses on the dollar, that has (downward) implications for dollar/yen. There's a bigger picture in terms of volatility and risk aversion," BTM UFJ currency economist Derek Halpenny said.
By 1153 GMT, the euro was up 0.3 percent on the day at $1.3787, having set a record high of $1.3799, according to Reuters data. The common currency also hit a lifetime peak at 168.55 yen.
The dollar was down 0.1 percent at 122.14 yen, while sterling hit a 26-year high of $2.0364. The dollar index was down 0.15 percent at 80.610, having just struck a two and a half year low of 80.545. On Wednesday the Federal Reserve's broad nominal dollar index fell to its lowest level in a decade.
The dollar's selloff this week was exacerbated by reports from credit rating agencies Standard & Poor's and Moody's Investors Service on Tuesday that warned about $17 billion of debt related to risky mortgages, much of it subprime. Subprime loans are extended to borrowers with poor credit histories. This has prompted interest rate futures markets to go back to pricing in a Fed rate cut later this year.
Fed officials, led by Philadelphia Fed President Charles Plosser and Fed Governor Kevin Warsh, played down on Wednesday the wider threat from any subprime fallout. But while other central banks such as the European Central Bank, Bank of England and eventually the BoJ are in tightening mode, the dollar's yield appeal is eroding.
The hunt for yield from Japanese investors, meanwhile, could limit the yen's upside, especially after BoJ Governor Toshihiko Fukui said on Thursday that BoJ policymakers wanted more time to assess the economy before raising rates. The Australian dollar was down 0.4 percent on the day against the Canadian dollar at C$0.9071.