The Japanese currency dropped more than two yen in a matter of hours, hitting 103.36 to the dollar, its strongest level since January 1996. It hit 107 against the euro - equivalent to its highest level against the deutschmark since records began 30 years ago.
The yen has now risen 16 per cent against the dollar since the start of June, as growing enthusiasm for Japan's economy has attracted currency flows and outweighed efforts by the Bank of Japan to cap the yen's rise.
Economists said the yen was on track to hit 100 against the yen. Nick Stamenkovic, senior bonds analyst at IDEAglobal.com, said the Japanese were heavy investors in US assets, especially in treasuries. "If they think the dollar is vulnerable then they could shift their assets out, which could be problematic for bonds."
The dollar was battered on Tuesday by news of a record current account deficit, sparking fears that America cannot continue attracting foreign investment. A cheaper currency would raise fears of inflation through higher import prices, upsetting the stock and bond markets, and eventually slowing the economy.
Fears of rising inflation were dampened by figures yesterday showing core consumer prices rose at their slowest rate for 33 years. The core consumer price index, which excludes oil, rose 1.9 per cent in August, helping the dollar recover to 104.3 against the yen.Reuse content