The euro hit a seven-month high against the yen as the European Central Bank's shift toward eventually raising rates has underscored expectations that rates in Japan will stay low for a while yet.
The Fed raised its funds rate to 4 percent on Tuesday and analysts see it climbing to 4.5 percent or higher next year, just as they increasingly see the ECB raising rates from a record low 2 percent by the end of the year or early in 2006.
Investors were looking ahead to the ECB's policy meeting on Thursday to see whether the central bank gives any hint on its next move and whether ECB President Jean-Claude Trichet keeps up the inflation-fighting mantra.
"With the Fed over, the focus is on the ECB's tone on euro rates," said Toshiaki Kimura, forex manager at Mitsubishi Trust and Banking. "We're expecting hawkish comments from Trichet, and this should support the euro in the near term."
In contrast, the Bank of Japan has pinned overnight rates near zero for more than four years and has said it will move gradually in shifting policy even as the economy is expected to defeat deflation later this year or in early 2006.
Low yields have prompted Japanese investors and households to plough more funds into higher-yielding foreign bond funds, while speculators have piled up their bets against the yen.
"The Japanese yen is the only major currency that shows a clear trend, so speculative money is coming in," said Kosuke Hanao, head of forex sales at Royal Bank of Scotland in Tokyo.
In late Asian trade, the dollar hovered around 116.75 yen after hitting 116.87 yen on electronic trading platform EBS, its highest since September 2003.
Some traders said talk of option barriers around 117 yen capped the US currency's gains.
The euro rose to around 140.70 yen, its highest since mid-March. Against the dollar, the euro climbed to $1.2035 from late New York levels around $1.20.
The euro/dollar rate has been stuck roughly between $1.19 and $1.22 in the past six weeks.