The dollar climbed to a 4-1/2-year high against the yen, helped by data indicating U.S. retail sales growth in May was the highest since January 2006 which many investors took as a sign of a pickup in U.S. economic growth.
Limiting the dollar's gains was a dip in the U.S. 10-year Treasury yield which fell from five-year highs even as more investors seem willing to bet that the Federal Reserve's next move could be a hike in interest rates.
Higher U.S. rates raise the attractiveness of dollar denominated securities and stoke demand for the dollars to buy them.
"The market is interest rate focused and retail sales were really quite strong suggesting economists may revise up their forecast for the second quarter even further," said Meg Browne, currency strategist at Brown Brothers Harriman. "But a lot of the good news is already in the market."
The dollar rose against the yen . Earlier, the dollar had hit a 4-1/2-year high against the low-yielding yen at 122.65 yen.
The euro fell against the dollar . The euro had plumbed an 11-week low of $1.3264 earlier in the day.
The dollar rose to a four-month high of 1.2469 Swiss francs, up for its fifth consecutive session before surrendering some gains . Sterling fell .
Growth Bulls In Charge of Dollar
Some U.S. investment banks in the last few weeks have upwardly revised their views on U.S. economic growth in the second quarter to a 4% annualized rate, which would be a sharp rebound from the first quarter.
Markets have also reflected expectations of faster growth. While U.S. Treasury debt rose on Wednesday largely due to short-covering, yields have risen steeply since April on a steady stream of stronger economic data, pulling the dollar higher in their wake.
Over the last week, bond markets have even begun to price in a chance that the Federal Reserve will raise interest rates next year.
The dollar generally strengthens when dealers anticipate a rise in U.S. interest rates and the dollar index, a gauge of the greenback's performance against a basket of six major currencies, briefly rose above its 100-day moving average for the first time since mid February, a positive technical signal for the markets.
On Wednesday, the spread between the implied U.S. interest rate in December 2008 and the euro zone's has widened to 67 basis points, up from around 43 basis points at the end of April, according to futures markets.
"From a broader perspective when we look at rises in real bond yields, the United States has outpaced that in the euro area so in that sense the decline in euro/dollar is justified," said Todd Elmer, currency strategist with Citigroup Global Markets in New York.
Elsewhere, four U.S. senators unveiled an expected and long-awaited bill on Wednesday aimed at forcing China to more quickly raise the value of its currency by giving the U.S. Treasury Department new tools to pressure Beijing.
Also expected was The U.S. Treasury Department on Wednesday labeling China's currency "undervalued" and pledging to keep pushing for it to appreciate but saying that Beijing was not manipulating its currency for trade gains.