The dollar fell against the euro and sank to a 14-year low versus sterling as strong economic data and hawkish comments by central bankers suggested interest rates will continue to rise in Europe.
The euro climbed to a record high versus the low-yielding yen as investors favored higher-yielding currencies. Supporting that trade were comments from European Central Bank officials, who said they may need to raise interest rates from the current 3.5% if growth in the region is solid.
"The combination of strong economic data, hawkish remarks by the ECB and the fact that interest rates are likely to go up in Europe is giving a lot of support to the euro and sterling today," said Omer Esiner, foreign exchange market analyst at Ruesch International in Washington. "Bottom line: the market wants higher-yielding currencies."
In Europe, a report showed industrial new orders in the euro zone rose more than expected in November, or 1.4%, from October. Economists polled by Reuters expected orders to rise by 1.0%.
While traders expect European interest rates to rise, U.S. rates appear to be on hold for the near future, helping boost the euro.
Meanwhile, sterling had climbed to 241.12 yen, a level last seen in September 1992. Traders said the move in sterling/yen sparked the pound's rise to 14-year peaks against the dollar as high as $1.9917.
Analysts said British interest rates, which are level with those in the United States at 5.25% but seem more likely to rise, supported sterling against the dollar and the yen.
"Markets continue to be getting more hawkish on UK interest rates relative to the U.S.," said Mitul Kotecha, head of global foreign exchange research at Calyon.
The Bank of England's surprise rate hike earlier this month boosted sterling's yield appeal. BoE minutes from that meeting, to be released on Wednesday, will be closely scrutinized.
Sterling earlier hit four-year highs versus the euro, but pared most of its gains.
At the same time, Japanese interest rates at just 0.25% and doubts about whether the Bank of Japan will tighten in February weighed on the yen. The carry trade -- in which investors borrow the yen and other low-yielding currencies to fund investments in currencies with higher returns -- has enjoyed a renewed surge in popularity.
"The yen has been the least favorite among the major currencies and it is likely to remain pressured for some time," said Ruesch's Esiner.
Market participants are awaiting U.S. housing data later in the week to confirm that the real estate market has overcome a soft patch, and Germany's Ifo survey of business sentiment for
January, due on Thursday. The index could add to expectations for a rate rise by the ECB in March.