The dollar climbed to a 4-1/2-year high against the yen on Wednesday, helped by data indicating US retail sales growth in May was the highest since January 2006, which many investors took as a sign of a pick-up in US economic growth.
Limiting the dollar's gains was a dip in the US benchmark 10-year Treasury note yield which fell from five-year highs even as investors seem more willing to bet that the Federal Reserve's next move could be a hike in interest rates. Higher US interest rates raise the attractiveness of dollar-denominated securities and stoke demand for the dollars to buy them.
"The market is interest rate focused and retail sales were really quite strong suggesting economists may revise up their forecast for the second quarter even further," said Meg Browne, currency strategist at Brown Brothers Harriman. "But a lot of the good news is already in the market."
In late afternoon trading, the dollar rose 0.9 percent against the yen, changing hands at about 122.73 yen, close to the session high of 122.76 yen, a 4-1/2-year high. Dollar/yen also got a boost in technical trading triggered first by investors selling the yen against the euro, said Brian Dolan, chief FX strategist, at Forex.com in Bedminster, New Jersey.
Investors broke through initial resistance on the euro/yen at 162.80 which had been around the high in the currency pair for the past several sessions. "Once we got beyond that, dollar/yen popped as well," Dolan said. Euro/yen last changed hands up 0.9 percent at 163.35 yen.
The euro was trading at $1.3304, little changed on the day. The euro had plumbed an 11-week low of $1.3264 earlier in the day. The dollar rose to a four-month high of 1.2469 Swiss francs, up for its fifth consecutive session before surrendering some gains to trade at 1.2451 francs. Sterling fell 0.1 percent to $1.9727.
Some US investment banks in the last few weeks have upwardly revised their views on US economic growth in the second quarter to a 4 percent annualised rate, which would be a sharp rebound from the sluggish first quarter.
Markets have also reflected expectations of faster growth. While US Treasury debt rose on Wednesday largely due to short-covering yields have risen steeply since April on a steady stream of stronger economic data, pulling the dollar higher in their wake.
Over the last week, bond markets have even begun to price in a chance that the Federal Reserve will raise interest rates next year. The dollar generally strengthens when dealers anticipate a rise in US interest rates and the dollar index a gauge of the greenback's performance against a basket of six major currencies, briefly rose above its 100-day moving average for the first time since mid-February, a positive technical signal for the markets.
On Wednesday, the spread between the implied US interest rate in December 2008 and the euro zone's has widened to 70 basis points, up from around 43 basis points at the end of April, according to futures markets.