The dollar ricocheted up from three-year lows against the yen and a record low against the euro on Wednesday, snapping out of its losing streak on yen-selling intervention by the Bank of Japan, traders said.
"Overall, general dollar strength is a little bit of a knock-on from the Bank of Japan taking the froth off the top ... given session after session with nothing standing in the way of dollar weakness," said David Durrant, chief currency strategist at Bank Julius Baer.
"Then you see a little something from the BOJ and that raises the flag of caution up to the dollar bears," he added.
The dollar surged over 1 percent to a session high around $108.75 yen in a matter of minutes and dealers estimated the BOJ may have bought up to $5 billion in covert action, even though there was no official confirmation from Tokyo.
However, it subsequently lost roughly half of that surge in the course of European and early North American trading hours to 108 yen, still a gain of 1 percent from Tuesday's New York close. The dollar had touched a three-year low below 107 yen on Tuesday.
"But the rally is fading and the risk is that they may intervene again later," said Paul Mackel, currency strategist at ABN AMRO in London.
The greenback had been edging higher in Asian trade after the U.S. Federal Reserve stuck with its pledge to keep monetary policy easy "for a considerable period" on Tuesday but dropped its concern about falling prices.
The dollar rose slightly against the Swiss franc and Canadian and Australian dollars and rebounded from a fresh 11-year low against sterling of $1.7477. This is cable's best showing since October 1992, a few weeks after Black Wednesday, when Britain left Europe's Exchange Rate Mechanism.
And on the ninth day ...
After eight straight sessions of record highs against the dollar, the euro rally paused, slipping slightly on the day to trade at $1.2250 . On Tuesday the euro rose to a record high $1.2276, according to Reuters data.
European Central Bank Governing Council member Ernst Welteke said the euro is near its long-term average value and this should not harm the competitiveness of European firms.
"We know markets tend to over-shoot, but I do not see this in the current situation," Welteke told reporters.
Welteke also said interest rates in the euro zone -- currently 2 percent -- are likely to stay at their record lows for a considerable time, mirroring the language of the Fed.
Downward spiral
Before Wednesday, Japan was thought to have thrown almost 18 trillion yen ($168 billion) at the foreign exchange markets this year in a bid to prevent a strengthening yen from choking off the country's export-led recovery.
Japanese Finance Minister Sadakazu Tanigaki declined comment on whether the authorities had acted but dealers said Tokyo might have wanted to calm foreign exchanges after the dollar's string of lows threatened to turn its fall into a rout.
"I think Tokyo knows that when market conditions look threateningly like they are moving into disorderly conditions that the scope for coming in more aggressively is there," said Derek Halpenny, currency economist at Bank of Tokyo Mitsubishi.
An advisory panel to Prime Minister Junichiro Koizumi said the economy was still in a mild deflationary state but there were some signs of change.
There has been market speculation Japan is close to its allotted ceiling for intervention funds. But a top Ministry of Finance official told Reuters there had been no problem with raising funds via three-month finance bills and he saw no need to use longer maturity debt.