The dollar rose against the yen and was mixed versus the euro after the release of the minutes of a Federal Reserve meeting showed policy-makers believed more interest rate increases may be needed to contain inflation.
At its last meeting, the Fed's policy-setting committee saw downside risks to growth but agreed that it may have to raise rates again to tame inflation, according to the minutes.
"The dollar is rallying after the minutes, because it's been plunging for such a long time that it has no way to go but up," said Axel Merk, a portfolio manager at the Merk Hard Currency Fund in Palo Alto, California. "There are also some tough words in there, such as 'more policy tightening may be necessary.'"
The euro slipped to session lows of $1.3408 shortly after the release. The dollar also rose to a session high of 1.2225 Swiss francs.
Meanwhile the yen hit a record low against the euro after the International Monetary Fund said it saw no need for "heavy-handed" action on the yen carry trade, in which investors have been borrowing in yen to finance purchases of higher-yielding currencies such as sterling.
The euro was up after rising as high as 160.40 yen, hitting a record high for the second straight session. The euro was trading down, retreating from a 2-year high of $1.3457 struck in the previous session.
The Fed left benchmark overnight interest rates on hold at 5.25% in late March and removed a phrase pointing to further monetary tightening from its statement accompanying that decision. That initially led to a fall in the dollar and reinforced expectations that the Fed is closer to cutting rates to stabilize a housing-led slowdown in the economy.
But the market has since reinterpreted the changes to that statement, and Fed officials have continued to stress that they are keeping a close eye on inflation, implying they are in no hurry to lower rates.
The yen also hit fresh decade lows against the Australian and New Zealand dollars after the IMF's comments on the yen carry trade.
European officials have complained loudly about the yen's persistent weakness, which they worry gives Japanese exports an advantage. But there have been few signs that the issue will be taken up in earnest at a meeting of the Group of Seven finance ministers and central bankers in Washington on Friday.
Many analysts say yen carry trades are likely to continue after Japan left interest rates unchanged at 0.5% this week, the lowest in the industrialized world.
Sterling was up , boosted by a newspaper report that the Treasury may allow UK-based firms to repatriate their foreign profits tax-free.
Traders were also awaiting speeches by Fed chairman Ben Bernanke and Richmond Fed President Jeffrey Lacker.
Bernanke is due to speak at 1 p.m. New York time on "market discipline and regulation", while Lacker is scheduled to talk at 12:45 p.m. on inflation and unemployment.