The US dollar fell on Wednesday with the yen surging on expectations that Japan's ultra-easy monetary policy will soon end, while the euro, pound sterling and yuan also strengthened.
The dollar was down 1.08% against the Japanese currency at 146.74 yen.
The yen strengthened as Japanese bond yields surged to six-week highs. The head of the Bank of Japan, Kazuo Ueda, said on Tuesday that the prospect of meeting the central bank's inflation target was gradually improving, adding to expectations that the country may soon abandon ultra-loose monetary policy.
Ueda's comments give the market some confidence that April is a live date for a potential exit from current policy,” said Ray Attrill, Head of FX Research at National Australia Bank. Strong Japanese export data on Wednesday contributed to positive sentiment.
The euro was last trading 0.71% firmer at $1.0927 against the US dollar after slipping 0.27% on Tuesday.
The euro continued to strengthen after the purchasing managers' index (PMI) showed that the economic slowdown in the European zone eased slightly in January, although it was still slow.
The US dollar index was down 0.79% at 102.58, reversing a 0.26% gain two days earlier.
Francesco Pesole, foreign exchange strategist at ING, said China's announcement that it would reduce the amount of cash banks must hold as a reserve in early February, in an attempt to stimulate lending and the economy, also helped the euro.
"The European zone is very dependent on China, so it usually tends to have a good correlation with whatever happens (there)," he continued.
Sterling also strengthened after a strong PMI reading led market players to reduce their bets on a Bank of England rate cut this year, a process that began with a stronger-than-expected inflation reading earlier this month.
The European Central Bank is expected to set interest rates on Thursday and may provide an indication of when the euro zone's borrowing costs might start to fall. The Fed sets rates on Wednesday next week, followed by the Bank of England on Thursday.
Investors also await US PMI data and Canadian interest rate results. The US rate futures market expects about a 52% chance of a rate cut in March, up from Tuesday but down from about 80% about two weeks ago, based on LSEG data.
