The dollar rose on Monday to its highest this year against a basket of major currencies, boosted by a sharp fall in oil prices, while sterling extended its recent slide and fell to new record lows against the euro.
The rise in the dollar's broad value pushed the euro under $1.46 and sterling below $1.80 for the first time since April 2006.
The pound's losses were exacerbated by UK economic data and a bleak economic view from the UK finance minister.
The yen shrugged off the surprise resignation of Japanese Prime Minister Yasuo Fukuda and took its cue from weakness in global equity markets to notch up five-month highs against the euro and other major currencies.
Monday's highs in the dollar and yen, and the lows in sterling and oil, were reached in trading conditions that were less liquid than usual as U.S. markets were closed for the Labor Day holiday.
"This is mainly due to the oil effect. There's a huge relationship between the oil and the dollar," said Carole Laulhere, currency strategist at Societe Generale in Paris.
"Oil is the main driver for the dollar today." Hurricane Gustav was downgraded on Monday to Category 2 status, diminishing the risk posed to the oil and energy facilities on the U.S. Gulf Coast.
Oil tumbled more than 4 percent below $112 a barrel . The dollar has strengthened sharply in recent weeks as oil has lost more than $35.
Cheaper oil eases the burden on the U.S. consumer, who accounts for some 70 percent of all U.S. economic activity, and encourages dollar-supportive trading and the unwinding of hedging strategies.
The dollar index was up 0.6 percent on the day at 77.63, having earlier peaked at 77.694, a level not seen since last December.
The euro fell versus the dollar, edging closer close to a six-month low of $1.4567 hit last week.
Yen Shrugs Off Fukuda
Sterling sank to a record low against the euro and to its weakest in 12 years against the currencies of the UK's major trading partners after UK Chancellor of the Exchequer Alistair Darling said at the weekend the economic outlook was its most challenging in 60 years.
The pound fell below $1.80 for the first time since April 2006, suggesting the factors that contributed to its dismal showing in August, when it suffered its steepest monthly decline in 16 years, are very much alive.
Mortgage and manufacturing data did little to dispel the notion that the economy may actually be in recession.
While the Bank of England is expected to keep interest rates on hold later this week, traders are looking for an easing before end 2008.
"The economic data is just coming in awful and you aren't getting the sense of things bottoming out like you might in the U.S.," said Michael Hart, head of European FX strategy at Citigroup.
"It's very hard to construct a positive story out of the UK from the data." Data on Monday showed that the UK manufacturing sector is still contracting and mortgage approvals fell to an all-time low in July.
Sterling was down sharply against the dollar, having traded as low as $1.7985.
The euro was up against the pound, having earlier hit an all-time high of 81.40 pence, while the BoE's index of sterling's value against currencies of the UK's major trading partners was fixed at a 12-year trough of 88.7.
The Japanese yen, meanwhile, shrugged off the surprise news of Fukuda's resignation -- the second Japanese leader to resign abruptly in a year -- over what he called political gridlock.
It hit five-month highs against the euro, Australian dollar and sterling as investors' appetite for risky carry trades that involve selling the low-yielding yen cooled.
"During times of domestic (economic) difficulties or (financial market) stress you get repatriation, and that supports the yen, as does carry unwind," said Citigroup's Hart.
Societe Generale's Laulherne agreed: "Risk sentiment is much important for the yen than politics."
The dollar was lower versus the yen and the euro was down against the yen .
The yen also hit five-month highs against higher-yielding currencies at 91.75 yen per Australian dollar and 194.16 yen per UK pound.