The dollar slipped on Tuesday as growing expectations of a rise in Australian interest rates boosted high-yielding currencies, while the yen rallied on chatter that China may also lift rates.
The Australian dollar hit a three-month high versus the US currency after minutes from a policy meeting of the Reserve Bank of Australia fuelled speculation that the central bank may keep lifting rates after a 25 basis point increase earlier this month.
That helped spur demand for carry trades, in which investors borrow the low-yielding yen to fund purchases of higher-yielding currencies and assets, and helped push the New Zealand dollar to a seven-month peak against the US dollar.
The yen received a jolt of buying late in the session as the Chinese yuan hit a post-revaluation high after domestic inflation climbed to an 11-year peak, prompting talk that the People's Bank of China may soon lift interest rates. "Talk about China is pushing the yen higher," said Hiroshi Yoshida, a trader at Shinkin Central Bank."
The yen is sometimes considered a proxy currency for the illiquid yuan, although the two rarely move in tandem. The dollar fell roughly 0.3 percent to 107.75 yen on electronic trading platform EBS, pulling further away from a one-month high of 108.62 yen hit last week.
The euro jumped roughly the same amount to $1.4716, its highest in two weeks. Against the yen, the single European currency was little changed at 158.65 yen, recovering from a slide to 158.27 yen. The Australian dollar was up 0.7 percent, hovering near $0.9209 touched against the dollar for the first time since early November.
The Aussie shot up after RBA minutes released early on Tuesday showed that the central bank debated a hefty 50 basis point interest rate hike at its meeting earlier this month when it delivered a 25 basis point increase.
The RBA left the door open for more rate rises from the current 11-year high of 7 percent to cool the country's inflation pressures, with the market expecting another hike next month. The New Zealand dollar traded 0.3 percent higher at $0.7970, after climbing to $0.7987 on the view that interest rates in the country will hold at 8.25 percent for now.
The Aussie and kiwi both struck two-month highs against the yen, as a 0.9 percent gain in the Nikkei share average and broad gains in Asian shares stirred risk appetite, prompting some investors to sell the low-yielding Japanese currency for high yielders.
Weakness in the dollar helped to boost the euro, which edged up after sliding earlier in the month on expectations the European Central Bank will lower interest rates this year. The euro has bounced back against major currencies after ECB officials cooled speculation of looser policy this year, but lingering expectations for a rate cut have kept the single currency below its record high of $1.4968 hit late last year.
In contrast, the Federal Reserve has slashed benchmark interest rates since September to 3 percent from 5.25 percent, with investors expecting another rate cut next month as the US economy continues to show signs of weakness.
The NAGH/Wells Fargo Housing Market index due at 1800 GMT is expected to be unchanged from January, suggesting that sentiment has not improved after sliding to near a record low last month.
A weak reading in the survey, along with figures on US housing starts later in the week, would bolster the view that the housing sector is continuing to suffer while raising the prospect of a recession, which could push the dollar lower, analysts said.
"This week's housing data probably won't be very good, but traders are waiting to see if it comes in significantly worse than expected," said Kimihiko Tomita, vice president of foreign exchange at State Street in Tokyo.