LONDON/NEW YORK: The dollar surged to a 24-year peak against the yen and a 37-year high versus sterling as Japan's dovish monetary policy and Europe's economic problems contrasted with a relatively stronger U.S. economy and a hawkish Federal Reserve determined to bring down inflation to its 2% inflation target.
The U.S. currency soared as high as 144.99 yen, hitting the level for the first time since August 1998. It is now within a large leap of its 1998 high of 147.43. The dollar was last up 1.1% at 144.305 yen.
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"The dollar is a rock in a sea of troubles right now, outperforming all of its major rivals as interest rates rise and the economy shows signs of resilience," said Karl Schamotta, chief market strategist, at Corpay in Toronto.
"With measures of core inflation barely budging, and the central bank (BoJ) showing no inclination to change direction, yield differentials have continued to worsen - depressing returns in relative terms and adding fuel to a burgeoning yen-funded carry trade," he said.
In carry trades, investors borrow in low-yielding currencies such as the yen or Swiss franc to purchase higher-yielding ones such as the Australian or New Zealand dollars.
Against sterling, the greenback hit $1.1407, the lowest since 1985 and last down 0.8% at $1.1425.
The euro fell below 99 cents on Wednesday after dipping as low as $0.9864 on Tuesday, its lowest since October 2002. Europe's single currency was last up 0.3% at US$0.9930.
The European Central Bank is seen as more likely than not to deliver a massive 75 basis-point (bp) rate hike on Thursday, but these expectations are doing little to support the currency in the face of a battered European economy and Russia's decision to keep the key Nord Stream 1 gas pipeline shut indefinitely.
In contrast, a report overnight showed the U.S. services industry unexpectedly picked up last month, supporting the view that the economy is not in recession.
Also on Wednesday, the Bank of Canada hiked interest rates by 75 bps three-quarters of a percentage point to a 14-year high on Wednesday, as expected, and said the policy rate would need to go even higher as it battles raging inflation.
Despite the BoC rate hike, the U.S. dollar was steady against the Canadian currency, up 0.1% at C$1.3164.
Moves in the FX markets were most dramatic for the yen, whose tumble, even by its own recent standards, has been precipitous. The dollar has climbed 4.2% from 138.96 yen just since the end of August.
At the current dollar/yen levels, speculation is also growing that Japanese authorities could intervene to prop up the currency.
Japan's Chief Cabinet Secretary Hirokazu Matsuno told a news briefing that the administration would like to take necessary steps if "rapid, one-sided" moves in currency markets continue, ratcheting up the rhetoric.
However, many analysts see intervention as difficult.
"Foreign central banks are prioritising dealing with inflation, and cannot afford to worry about exchange rate fluctuations," said Rikiya Takebe, senior strategist at Okasan Securities.
Elsewhere China's yuan sank to a two-year trough, closing in on the 7-per-dollar mark despite steps by authorities to stem its decline.
The onshore yuan weakened to a low of 6.9808, the softest level since August 2020, and the offshore yuan was even closer to the key level, falling as low as 6.997 per dollar.
Cryptocurrency bitcoin slumped to the lowest since June 19 at $18,540, extending a 5% tumble from Tuesday. But it was last up 0.7% at $18,920.