Sterling rose on Wednesday, boosted by Bank of England meeting minutes that reflected a surprising bias for higher interest rates, while the euro and dollar climbed for the fifth day in six against the low-yielding yen.
Without U.S. economic data to provide direction, foreign exchange markets centered on the differences in relative interest rates and traders favored currencies tied to higher or rising rates.
Sterling rose to $1.9941, a two-week high, and hit a fresh 15-year peak against the yen after BoE minutes revealed that officials fell one vote shy of lifting interest rates at a meeting earlier this month, with central bank governor Mervyn King among those favoring a hike.
The Swedish crown was the top performer on the day, on track for its biggest one-day gain against the euro in nearly five years, after the Riksbank lifted rates to 3.5 percent and unexpectedly raised its year-end interest rate forecast.
Earlier this week, the euro hit its best level against the Swedish currency in more than a year.
It seems clear to me that central banks globally are a little more comfortable with the risk outlook and are taking a bit more liquidity out of the markets, said Firas Askari, head of currency trading at BMO Capital Markets in Toronto.
The BoE minutes left markets bracing for a rise in UK rates to 5.75 percent, from 5.5 percent, in July.
Markets will watch speeches from the BoE's King and UK Finance Minister Gordon Brown, both due around 4 p.m. ET (2000 GMT), for more monetary policy clues.
The yen, tethered to Japanese interest rates at just 0.5 percent, continued to suffer in this environment, and was last trading at 165.88 yen per euro.
The dollar was near a 4-1/2-year peak at 123.52 yen, up 0.2 percent from late Tuesday. The yen has slid since Bank of Japan Governor Toshihiko Fukui said last week that officials wanted to confirm the sustainability of capital and consumer spending, dashing expectations that rates could rise to 0.75 percent next month.
Niels From, currency strategist at Dresdner Kleinwort in Frankfurt, said global equity gains have boosted carry trades, which involve borrowing yen to buy higher-yielding assets.
The minutes from the Bank of England are also supportive in general for the carry trade, with the sterling being one of the high yielders, he added.
The euro was little changed at $1.3430.
The Fed is seen keeping interest rates on hold at 5.25 percent this year, while markets are bracing for at least two more hikes in euro-zone rates, which now stand at 4 percent.
Askari said the dollar story hasn't really changed and predicted a gradual chipping away at the greenback as higher rates elsewhere prompt investors to shed some dollar holdings.
The Japanese currency plumbed multiyear troughs against the high-yielding Australian and New Zealand dollars.
The kiwi dollar also pushed to US$0.7629 against the greenback. The Reserve Bank of New Zealand has twice turned to intervention to knock the currency down, but analyst said 8 percent interest rates are proving irresistible to foreign investors.
The Swiss franc, which has the second-lowest interest rate in the developed world after the yen, rose against the euro and dollar after producer and import price inflation in May came in much higher than expected.
(Additional reporting by Toni Vorobyova in London)