The dollar rose above 90 yen for the first time since mid-March yesterday following joint intervention by the US Federal Reserve and the Bank of Japan and surprise measures announced by the Japanese Ministry of Finance to stimulate overseas investment by institutional investors.
The sharp rise took the dollar to Y90.85 at the end of the London session, up nearly Y3 on yesterday's close of Y88.05 in New York. The dollar also rose 2 pfennig against the German mark at the end of London trading compared with New York's close of DM1.3764 the previous day.
The pound had a good day, helped by the recovery of the dollar against the German mark. It ended at DM2.2360, up 3 pfennig on Tuesday's close.
According to Lee Ferridge, currency strategist at NatWest Markets, sentiment was improved by better-than-expected trade figures and a tempering of Bank of England concern about inflation prospects. The pound was also helped by speculation in the markets about a fall in German interest rates.
The FT-SE 100 index surged 1.5 per cent to above 3,500, within reach of its all-time closing high of 3,520.3, while the German DAX put on 0.97 per cent. On Wall Street, the Dow Jones Industrial Average rose 54 points at one stage, but retreated to close 10.22 points down at 4,690.95.
The joint intervention in the markets by the US and Japanese authorities was the first since 7 July and confirms suspicions that a "reverse Plaza" agreement has been reached to weaken the yen. The original Plaza agreement in 1985 was a deal to weaken the dollar. The Federal Reserve Bank of New York was purchasing dollars at a rate of Y90.95.
The US government, which appeared happy to allow the yen to soar earlier in the year, changed its tune at the end of June when it drew back from its threat to impose trade sanctions on luxury car imports.
Brendan Brown, economist at Mitsubishi Finance International, said: "The US authorities are acutely aware of the risk of an implosion of the Japanese financial system. They now take the view that this must be avoided at all costs."
The package of measures announced by the Japanese Finance Minister, Masoyoshi Takemura, was designed to get institutions to start investing overseas again after huge losses on foreign investment since the mid-1980s. The principal changes involve the accounting methods used by institutions to value foreign portfolios.
Mark Cliffe, international economist at HSBC Markets, said the chief importance of the package was symbolic, showing how serious the Ministry of Finance was about driving the yen down. "This package will further change the foreign exchange market's perceptions of Japan's determination to drive down the yen - and to that extent it has already succeeded."
UK market strategists said the Japanese move had had a big impact on bond and equity markets worldwide.