The dollar hit a 1-1/2 week low against the yen on Tuesday, as investors awaited more convincing evidence to boost US interest rate hike expectations after the currency failed to rally on strong US data. The yen was cheered by Tokyo stocks hitting a 13-month intraday high and drew support from a stronger yuan, which closed at its highest level since July 21, when Beijing revalued the currency.
The dollar also slipped against the euro on talk of central banks buying euros in recent sessions to diversify their largely dollar-based reserves.
"The problem for the dollar is that the data has done its job in terms of pushing up interest rate expectations to the point where the market is pricing rate hikes at three of the next four meetings," said Adam Cole, senior currency strategist at Royal Bank of Canada.
"The focus is shifting away from cyclical positives."
Rising US rates, which now stand at 3.25 percent, boost the appeal of dollar deposits for overseas investors and have pushed the dollar up 10 percent against the euro in 2005.
By 1130 GMT the euro was up 0.4 percent at $1.2218, after pushing to a 1-1/2 week high $1.2249 on Monday - just short of key technical resistance around $1.2260, the top of recent ranges.
The euro showed little reaction to slightly better-than-expected unemployment numbers for June and higher-than-forecast producer prices.
The dollar was down 0.7 percent at 111.42 yen, having hit a 14-month high of 113.72 in July.
The euro was down 0.4 percent at 136.14 yen. Following a recent pattern, the dollar slipped after a better-than-expected US manufacturing report on Monday.
Investors will examine key Personal Consumption Expenditures (PCE) data due later, the US central bank's preferred gauge of inflation, to see how much faster US interest rates need to rise.
The June core PCE is expected to rise 0.1 percent after rising 0.2 percent in May, pushing the year-on-year core PCE deflator up 1.6 percent. The data comes before a crucial July US jobs report on Friday.
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