The dollar surged against the euro after a key gauge of the U.S. manufacturing sector beat expectations in February, while a global sell-off in stock markets helped drive the yen sharply higher.
"This should really quiet the market, because there were emerging fears that the global equities sell-off would be further amplified by a deepening recession in U.S. manufacturing," said Ashraf Laidi, senior currency analyst at CMC Markets in New York.
The data helped slightly cool worries that the Federal Reserve may cut interest rates in the coming months, although futures markets showed the market was still expecting the U.S. central bank to lower rates from 5.25% by August.
The euro was last trading down 0.5% versus the dollar. The euro also tumbled against the yen, falling more than 1%.
The dollar fell 1% against the yen, recovering after a dip to 116.94, its lowest since mid-December. The dollar has sunk almost 3% against the yen this week, on track for its worst weekly performance in around 14 months.
The yen shot higher in early New York trade as a sharp fall in U.S. stock prices at the open led some investors to continue buying back the Japanese currency that they had borrowed to finance bets on risky assets.
Worries about rising defaults among high-risk borrowers in U.S. subprime mortgages, tensions over Iran's nuclear program and a run of weaker than expected U.S. data have all led investors to reduce their exposure to risky assets this week.
The yen's rally started Tuesday, when China's benchmark stock index posted its biggest daily fall in a decade. That triggered a rout in global stock markets that left some investors smarting and keen to cut back on other risky bets in their portfolios.
Along with the Swiss franc, the yen has been the prime beneficiary, since Japanese interest rates are the lowest in the industrialized world and investors have been selling yen to buy everything from the Australian dollar to India stocks.
"It's 'Buy yen, buy yen, buy yen' right now," said Thierry Elias, head currency trader at Banque Natexis Populaires in New York. "The yen is the flavor of the week, and I think this can keep going."
In another warning to markets, Japan's top financial diplomat Hiroshi Watanabe said today that investors should recognize the two-way risk in highly leveraged carry trades financed by borrowing in yen.
Analysts said currency markets may continue to take their cues from global equities this week. The MSCI world stock index slipped for a third straight session today, although losses were curbed as U.S. stocks steadied.
The Standard and Poor's 500 index tumbled almost 2% to a three-month low in early trade, but later recouped most of its losses to trade only slightly lower on the day.
"The market is much more focused on general financial market conditions and especially on the S&P futures and equity performance in Europe," said Daniel Katzive, strategist at UBS in New York. "This is the classic carry trade pressure pattern, similar to what we saw the day before yesterday."
Earlier today, the market shrugged off data showing showing that core U.S. consumer prices rose more sharply than expected in January and that jobless claims edged higher.