The dollar surged further on Friday as US Treasury yields rose ahead of a potentially large Federal Reserve interest rate hike next week, while China's yuan fell below the psychologically key 7 per dollar level.
The dollar is set to increase nearly 1% versus a basket of currencies this week as investors flock to the shelter of the greenback. The yuan is the latest currency to fall to multi-year lows as the dollar continues to strengthen.
The euro sank 0.5% to $0.9945, while sterling fell to a fresh 37-year low of $1.1351, down 1% on the day. By 1050 GMT, both had rebounded but were still lower.
The dollar index increased 0.5% to 110.26, close to its two-decade high of 110.79 set earlier this month.
"With the Fed poised to rise by another 175 basis points before the end of the year, we would expect financial conditions to continue unfavorable for assets in general, with the US dollar clearly benefiting," said Derek Halpenny, head of research, global markets, MUFG.
The surging dollar pushed the offshore yuan above the crucial 7-per-dollar level for the first time in more than two years overnight, with the yuan reaching a low of 7.0424.
The onshore unit did the same shortly after markets opened on Friday.
The Chinese economy was surprisingly resilient in August, according to data, with factory output and retail sales both growing faster than predicted. However, a worsening property downturn weighed on the forecast.
"Growth and policy difference between the US and China may continue to underpin the USDCNH in the next months, even if some retracement is visible intermittently," Maybank analysts said, noting some "upside surprises" in the Chinese data release.
Traders' attention will now shift to a series of monetary policy meetings next week by the Federal Reserve, the Bank of Japan (BOJ), and the Bank of England, with the Fed taking center stage.
US Treasury yields climbed after data released overnight revealed that retail sales in the United States unexpectedly rebounded in August, while the Labor Department reported that initial claims for state unemployment benefits declined by 5,000.
Fed funds futures indicate a 75% possibility of a 75-basis-point rate hike next week and a 25% chance of a 100-bps increase.
This might be bad news for the battered Japanese yen, which has suffered as a result of the strong dollar and widening interest rate differentials.
However, three sources familiar with the BOJ's thinking said the central bank had no intention of boosting interest rates or changing its dovish policy direction to support the yen.
The dollar was 0.2% down against the yen at 143.16, but it was still on course for its fifth consecutive weekly gain.
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