The dollar fell to a 15-month low against a basket of currencies on Tuesday, with sterling among the biggest gainers after a rise in UK inflation increased the chances of a UK interest rate hike sooner rather than later.
Relative interest rate expectations also lifted the euro to its highest against the dollar this year, but a reported options barrier at $1.4250 and a sharp sell-off in euro/sterling following the UK inflation data capped its gains.
The yen, meanwhile, was little changed on the day in a tight range, around 81 per dollar. Traders were wary of further intervention from the Group of Seven to counter yen strength, but reported nothing so far.
At 1115 GMT sterling was up 0.5 percent on the day at $1.6380, having earlier risen to $1.64, the highest since January 2010. Euro/sterling was down a third of 1 percent at 86.90 pence, and the euro was up 0.2 percent against the dollar at $1.4240.
The dollar index, a measure of the greenback's value against a basket of six major currencies, fell 0.2 percent to 75.254, the lowest since December 2009. The euro remains well supported by comments from ECB President Jean-Claude Trichet and other ECB policymakers, reiterating their stance that they are ready to act quickly to guard against inflation. Most economists expect a rate hike next month.
Japan again warned that it would act to keep the yen in check, but traders saw no action in the FX market on Tuesday from Japanese or other G7 authorities following last Friday's joint intervention. That resolve could be tested if dollar/yen looks like breaking back below 80 yen.
The dollar was last trading at 81.00 yen, down marginally on the day but in the middle of the day's narrow range of 80.80-81.30 yen. Yen volatility has eased significantly since late last week, and some analysts said calmer markets in the coming weeks would decrease the need for Tokyo to smooth any appreciation in the Japanese currency, even if the dollar creeps below 80 yen.
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