The dollar hovered near a 14-year low against the pound on Friday and a 20-month low versus the euro as the US currency suffered from expectations a weakening economy will prompt the Federal Reserve to cut interest rates next year.
The yen briefly dipped against the dollar after data showed the rise in Japanese core consumer prices unexpectedly slowed in October to just 0.1 per cent from a year ago, raising more doubts about how quickly the Bank of Japan can lift rates.
With the pace of core inflation so tepid, analysts said the BOJ may have a tough time raising rates as soon as this month's policy meeting despite the surprisingly strong industrial output figures earlier in the week.
The BOJ's quarterly tankan report on business sentiment, due on December 15, could be the deciding factor in whether the BOJ lifts rates to 0.5 per cent from 0.25 per cent in December or waits until early 2007.
"The slow rise in the CPI is an argument against an interest rate hike by the Bank of Japan," said Takumi Tsunoda, an economist at Shinkin Central Bank Research Institute.
"We will have to wait until the tankan corporate survey to grasp a clearer picture of the economic environment for a rate hike," he said.
The data came just a day after BOJ policy board member Tadao Noda said the central bank can raise rates even if core consumer prices stay at current low levels near zero.
The yen later recovered as speculators bought back the currency after the euro fell short of posting another record high above 153.45 yen.
The dollar slipped 0.2 per cent to 115.60 yen from near 115.80 yen in late New York trade the previous day, after spiking up to 115.88 yen after the CPI release.
The euro fell to 153.05 yen from near 153.40 yen late on Thursday. The single currency edged up to $1.3250
Sterling changed hands near $1.9670 after reaching $1.9700 the previous session, the strongest since September 1992 when Britain was forced to abandon its participation in the European Exchange Rate Mechanism, the precursor to the euro.
The pound hovered in sight of an eight-year high near 227.80 yen. The yen has suffered the past two years as other major central banks have ratcheted rates higher while the BOJ has pledged to move very slowly in normalising monetary policy after years of zero rates to pull the economy out of deflation.
Japan's ultra-low yields have prompted domestic investors to snap up higher yielding foreign bonds and assets, while others have borrowed in yen and used the funds to buy higher yielding currencies in the carry trade.
The dollar has taken a big hit as worries about the US economy and outlook for rates have coincided with increasing confidence in the strength of euro zone growth and building expectations for the European Central Bank to keep raising rates.
So far, Fed officials including Chairman Ben Bernanke have indicated they are more worried about inflation and are poised to keep rates steady at 5.25 per cent, even as bond investors see at least two rate cuts next year.
The ECB is widely expect to lift rates to 3.5 per cent at a policy meeting next week.
Thursday's US data showed Midwest business activity contracting in November for the first time in 3-years, offsetting another report showing solid growth in personal income and spending in October.