The dollar rose to its strongest level against the yen since the start of November after Tokyo stepped up its purchases of Japanese government bonds, creating downward pressure on the Japanese currency.

The dollar rose 1.1 per cent to Y78.46, its largest daily move since the Bank of Japan intervened to weaken the yen on October 31, while the euro rose 0.7 per cent to Y103.04.

The pound rose 0.6 per cent to Y123.01.

But analysts warned that pressures on the yen remained, with the bond purchases falling short of a direct intervention to weaken the currency.

“We believe pressure will be on the dollar-yen to drift to the downside,” said analysts at Morgan Stanley.

The pound was lower against the dollar and the euro on Tuesday after Moody’s, the rating agency, warned that it could downgrade the UK from its triple-A rated status.

The pound sank to a low of $1.5658 against the dollar, its weakest level in two weeks, and lost 0.2 per cent against the euro to €1.1928.

But sterling gained some support after inflation figures showed a drop in the consumer price index to 3.6 per cent in January, down from 4.2 per cent the previous month.

Analysts pointed to signs from the Bank of England last week indicating its view that a drop in inflation would be seen as positive for the UK economy.

“Stronger data will heighten the probability that this week’s BoE inflation report will adopt a less dovish outlook,” said Jane Foley, analyst at Rabobank. “This could lend the pound support.”

The euro was volatile following the announcement by Moody’s, which also put France and Austria on negative watch and cut ratings for Italy, Spain and Portugal.

A survey from Germany showing that investor confidence rose more than expected, reaching its highest level since April, helped the euro reach a session high of $1.3216, a rise of more than 0.1 per cent.

But the single currency later sank to lows of $1.3125, losing more than 0.5 per cent against the dollar, after figures showed that US retail sales rose by less than expected in January.

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