The dollar extended gains and rose 1 percent versus the Japanese yen on Wednesday as crude prices declined further and U.S. stocks eased some of their losses.
The dollar was last 1 percent up at 109.38 yen, a session high. That was also its highest level since January and the dollar was on track for its biggest one day gain versus the yen in three-weeks.
Demand for the euro fell ahead of the European Central Bank policy-makers meeting on Thursday.
The Fed Tuesday kept its benchmark federal funds rates steady at 2 percent and signaled in a statement that it is in no rush to push borrowing costs higher.
The ECB is widely seen holding its key lending rate Thursday at 4.25 percent.
"The U.S. economy is showing some signs of recovery and oil prices falling do help," said Meg Browne, a currency strategist at Brown Brothers Harriman in New York.
"Going into the end of the year and into 2009, the tip will be moving in favor to the U.S. dollar."
In morning trading in New York, the dollar was higher versus the yen, the highest since January, according to Reuters data.
The yen also fell against the euro, as gains in European shares whetted investor appetite for riskier assets, diminishing the Japanese currency's safe-haven allure.
With the Fed meeting over, investors turned their attention to ECB's policy views.
"Now the market's attention is shifting to the ECB meeting tomorrow and (ECB President Claude) Trichet is likely to make some pretty hawkish remarks," Browne said.
"But he will also have to acknowledge that economic data in Europe has been pretty slow."
The euro may find some support before the rate decision, analysts said, because of expectations that surging euro zone inflation will lead Trichet to maintain his hawkish stance on monetary policy.
Browne said that while the rate differentials between the United States and Europe still favor the euro in the short term, slowing growth in the euro zone will eventually lead the ECB to cut borrowing costs.
The euro eased against the dollar, retreating from earlier gains.
A Reuters poll of 61 strategists taken Aug. 4-6 showed most expect the euro to trade at around $1.54 over the next three months, before retreating to $1.50 in six months and $1.44 a year from now.
With crude oil prices down over one-fifth from a record above $147 a barrel in mid-July, and forecasts of zero growth in the euro zone economy in the second quarter, the euro's peak may well have been reached, the poll showed.
U.S. crude prices on Wednesday were stable, last trading above $119 a barrel.
Demand for the euro fell as a report showed German manufacturing orders for June dropped by a sharp 2.9 percent and stoked fears of a sustained period of weakness in Europe's biggest economy.
"Demand from abroad is collapsing, especially in the euro zone. The rest of the world is wobbling too, but not on the scale of Europe," said Andreas Scheuerle, an economist from DekaBank, in Berlin.
The dollar index, which tracks the U.S. currency's movements against the currencies of major trading partners, was 0.4 percent higher at 74.223, recovering from an earlier slip.