The dollar hit a 10-month high on Wednesday, pushing the euro to an almost nine-month low and keeping the yen in intervention territory, as investors bet that the United States economy will fair better with higher interest rates than competitors.
U.S. Treasuries stabilized after their recent heavy selloff, though yields remained near 16-year peaks, keeping the greenback solidly bid.
Still strong U.S. economic data has defied investor expectations for a slowdown and the Federal Reserve last week warned that it could raise interest rates again and is likely to hold rates higher for longer.
"The U.S. is most able to cope with these new challenges - higher interest rates and higher energy prices," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. "Even if the news stream from the U.S. is not that great, it still looks relatively better."
The U.S. dollar index, which measures the greenback against a basket of other major currencies, reached 106.72, the highest since Nov. 30.
The euro dropped to $1.0, the l5owest level since Jan. 6. Sterling reached $1.212, the lowest since March 17.
"It's clear now that markets see higher long-term yields in the U.S. for a longer period. That's the main driver for the dollar here," said Dane Cekov, senior FX strategist at Nordea.
Federal Reserve Bank of Minneapolis President Neel Kashkari said Wednesday it is not clear yet whether the central bank is finished raising rates amid ample evidence of ongoing economic strength.
Yen on intervention watch
Elevated U.S. yields have spelt trouble for the yen , which slipped to an 11-month low of 149.4 per dollar.
The dollar/yen pair tends to be extremely sensitive to changes in long-term U.S. Treasury yields, particularly at the 10-year maturity.
The yen's decline closer to the psychological level of 150 per dollar has put traders on high alert for any signs of intervention from Japanese authorities, as officials ramp up their rhetoric against the sliding currency.
"The fundamental upside pressure (to dollar/yen) from bond yields is simply too great to ignore," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. However, "even if there were intervention, it won't drive dollar/yen down permanently unless bond yields start to retreat in earnest too."
Minutes of the Bank of Japan's July meeting released on Wednesday showed that policymakers agreed on the need to maintain ultra-loose monetary settings but were divided on how soon the central bank could end negative interest rates.