"A sense of anticipation has built up over the past 24 hours that some kind of deal is in the pipeline," said Mark Cliffe, chief economist at ING Barings. "The danger is that if it isn't delivered the dollar will break below 100," he added.
The dollar rebounded more than 2 at one stage yesterday, and was 1.60 higher at just over 106 at noon in New York. Sterling briefly hit a new high of 63.76p against the euro.
The excitement was generated by a spate of comments from Japanese officials indicating that joint intervention to halt the yen's climb and dollar's fall would be on the agenda at next weekend's meeting of G7 ministers and central bankers in Washington. Keizo Obuchi, the prime minister, said co-operation would be needed to halt the rise in the yen. "We need to think of all possible measures," he said.
Takashi Nakanomyo, vice-minister at the Economic Planning Agency, said: "A rapid rise in the yen is unfavourable." He was echoing concern that the 12 per cent appreciation in the yen in little over a month would derail the economic recovery.
Lawrence Summers, the US Treasury Secretary, yesterday repeated his usual comment: "A strong dollar is very much in the interests of the US." But there was speculation that Japan's deputy finance minister discussed intervention with Treasury officials during a visit yesterday.
Analysts said the European Central Bank and EU ministers would also be concerned in case the euro was dragged towards dollar parity in the crossfire.
Traders remained sceptical about the impact of combined intervention even as they went on red alert for any sign of it. "I am sure G7 will issue a statement on the need for currency stability but it is what they do that matters," said David Brickman, an economist at Paine Webber.
The real test lay with the Japanese authorities, analysts said. Although the Bank of Japan has sold about $35bn-worth of yen in the past three months, it offset any impact on Japan's economy by "sterilising" the intervention. This involves selling an equal amount of short-term government bonds to ensure the intervention does not affect domestic money supply.
A credible deal to weaken the yen would have to involve an end to this sterilisation. Masaru Hayami, governor of the Bank of Japan, has refused to alter the policy of sterilisation. But it is clear he has come under government pressure to agree to a move that might be a precondition for US co-operation in currency market intervention.