TOKYO - The dollar hit fresh peaks on Thursday, sitting around its highest against the yen since November after a hawkish pause by the U.S. Federal Reserve.
Sterling, meanwhile, sank to fresh multi-month lows in the wake of an inflation report that surprised to the downside on Wednesday, as questions ramp up about whether the Bank of England may follow its U.S. peer in holding rates on Thursday.
The Fed met market expectations at its monetary policy meeting on Wednesday, holding interest rates steady at the 5.25% - 5.50% range.
The U.S. central bank, however, stiffened a hawkish monetary policy stance that its officials increasingly believe can succeed in lowering inflation without wrecking the economy or leading to large job losses.
The dollar index, which measures the currency against a basket of rivals, rose as high as 105.59 on Thursday, its strongest since March 9.
The index climbed for its ninth straight week last week, its longest winning streak in nearly a decade as resilient U.S. growth fueled a rebound in the dollar.
The Fed's benchmark overnight interest rate may still be lifted one more time this year to a peak 5.50%-5.75% range, according to updated quarterly projections released by the U.S. central bank, and rates kept significantly tighter through 2024 than previously expected.
The Japanese yen was feeling the heat after the Fed meeting, hovering around 148.39 per dollar and just off a fresh low of 148.47, its weakest since November.
Even as dollar/yen slips back toward levels seen at the end of last year, the possibility of the Bank of Japan tightening policy at Friday's meeting remains slim.
"We doubt Governor Ueda will provide strong guidance on monetary policy until he has gathered sufficient evidence of a virtuous wage-price cycle," said Carol Kong, economist and currency strategist at Commonwealth Bank of Australia, in a note.
An absence of change at the BOJ's meeting on Friday could push the dollar/yen to rise higher, she added.
"Together with Japanese officials’ warnings, the risk of a FX intervention by the BOJ continues to rise in our view."
Sterling was last trading at $1.2311, down over 0.2% in the Asian morning and at a fresh multi-month low against the greenback ahead of the Bank of England's rate decision later on Thursday.
Britain's high inflation rate unexpectedly slowed in August, official data showed on Wednesday, raising questions about how much higher the central bank will take interest rates a day before its next policy announcement.
While the CPI report was "a rare piece of good news" for the UK economy, the National Australia Bank said in a note that the data may complicate the BOE's decision.
"After stubbornly high average earnings data last week, a stronger inflation report would have made life a little easier for the BOE in delivering a potentially final 25bps rate hike this week."
Market participants had leaned heavily toward the BOE hiking rates again on Thursday for what would be the 15th time, but expectations quickly shifted following the data.
The euro was last down over 0.2% at $1.0632.
(Reporting by Brigid Riley. Editing by Sam Holmes)