The rally in the dollar took a bit of a breather today as traders booked profits on recent chunky gains ahead of key resistance levels, but the greenback's rally was seen intact in line with a brightening US economic outlook.
The dollar stood at 83.47 yen, having retreated from an 11-month peak of 84.19 hit yesterday. Traders said some selling kicked in after the pair gained 1.2 per cent this week and as it approached the 2011 high of 85.53.
"People are taking profits after huge gains this week made as the last group of hedge funds and other investors went dollar long," said Minori Uchida, a senior analyst at Bank of Tokyo Mitsubishi UFJ. "It's just a tiny correction in the uptrend which is likely to carry on to at least last year's high, maybe even above 86 yen."
The Federal Reserve's inflation target drove the Bank of Japan into setting its own 1 per cent price goal in February, minutes of the BOJ meeting showed, with a few policymakers calling for a higher target.
Traders focused on the minutes of the BOJ's meeting, when the central bank surprised by easing policy, because the move was one of several factors that led to subsequent weakness in the Japanese currency.
The pullback in the dollar saw the euro bounce off a one-month low of $1.3002 to $1.3092. Initial support is seen at $1.3000, followed by the February 16th trough of $1.2973.
The softer dollar also helped commodity currencies stage a comeback, with the Australian dollar jumping to $1.0535 from a one-month low of $1.0422 plumbed yesterday.
Support is seen at the 200-day moving average at $1.0404, with recent highs just above $1.0550 likely to cap the currency for now.
Traders said the US dollar was being supported by further evidence for the view that the recovery in the world's biggest economy is becoming more self-sustaining.
This has led markets to scale back expectations of more stimulus from the Federal Reserve and drive up US Treasury yields, factors underpinning the recent rise in the dollar.
Data yesterday showed the number of Americans claiming new jobless benefits fell to a four-year low last week and manufacturing activity in the Northeast picked up this month.
"With the major US equity indices going out at their highest levels for 10 years (Nasdaq), or since mid-2008 (S&P 500), and no sign that US Treasury yields are about to swoon, we look for further dollar advances one side or the other of the weekend," analysts at BNP Paribas wrote in a client note.
"One risk to this view is a scheduled speech from Fed arch-dove Charles Evans in Frankfurt. However, if even he were to suggest that there is no need to contemplate more easing at this stage (unlikely) that could well set up the next leg to the USD rally."
US consumer inflation data due later today will also be closely watched.
Reuters