The dollar hit a fresh 11-month high against the yen and a new one-month high against the euro on Wednesday after the Federal Reserve upgraded its economic outlook on Tuesday amid a string of U.S. data reports that indicate a firm recovery.
U.S. two-year Treasury yields reached a 7-1/2-month high after solid retail sales data on Tuesday, making the dollar less attractive to fund investments in higher-yielding assets.
The 1.1 percent rise in retail sales added to signs of a pickup in the world's largest economy after another encouraging monthly jobs report last week, the third in a row.
Acknowledging the trend, the Fed slightly upgraded its outlook, expecting moderate growth over coming quarters and a gradual decline in the unemployment rate, although it said the jobless rate remained elevated.
Recent monetary easing steps by the Bank of Japan and that country's record trading deficit powered by demand for fossil fuels have also helped the dollar, which has gained around 9 percent against the yen since the beginning of February.
The dollar's bullish movement has re-accelerated following the most recent FOMC and BoJ meetings, where the latter is expected to continue to loosen monetary policy as the former remains on hold for the time being, said Eric Theoret, currency strategist at Scotia Capital in Toronto, referring to the Fed's policy-setting Open Market Committee.
The dollar rose as high as 83.65 yen, its highest since mid-April. Traders said Japanese exporters were reluctant to sell the dollar and anticipated further strength. The dollar has advanced 8.6 percent against the yen in 2012 to date and analysts are raising their forecasts.
We have revised our dollar/yen forecast up to 90 in six months and think it will stay there until 12 months from now, said Raghav Subbarao, currency strategist at Barclays Capital in London.
Barclays' previous forecasts were for dollar/yen to be at 82 yen in six months and 84 yen in a year.
The euro struggled against the dollar, falling to a one-month low of $1.3028 after triggering stop-loss orders below support at $1.3054, around the 50 percent retracement of a January 16-February 24 rally. It later recovered to $1.3067, down 0.1 percent for the day.
Further support for the euro loomed at the next major trough on daily charts at the February 16 low of $1.2973.
Further boosting sentiment, the Fed said most of the largest U.S. banks passed its stress tests, bolstering strong gains on most stock exchanges.
Jens Nordvig, global head of FX strategy at Nomura, said the European Central Bank's long-term cash injections into European banks (LTRO) had also changed euro/dollar's trading dynamics.
In a way, the euro is the new dollar, with potential to become the favorite funding currency in global capital markets, he said.
The euro zone common currency strengthened against the Swiss franc, however, rising to a peak of 1.2117 francs, its highest since February 8, before a Swiss National Bank rate decision on Thursday.
Although economists polled by Reuters expect the SNB to stick to its euro/Swiss floor at 1.20 francs and keep interest rates at zero, there have been calls for the bank to raise the floor. The euro was last at 1.2102 francs.
The Australian dollar also dropped against its U.S. counterpart, touching a fresh seven-week low of US$1.0456. It was last at US$1.0463, down 0.8 percent.