The dollar hit a 4-1/2-year high against the yen on Thursday, extending gains after strong US retail sales data the previous session reinforced expectations that the Federal Reserve would not cut interest rates this year. A surge in benchmark US yields to five-year highs this week on an upbeat outlook for the economy, has stoked demand for dollar-denominated securities.
"Investors are thinking the economy is doing well as the US stock market has calmed down and they see few signs of inflation," said Koji Fukaya, senior currency strategist at Deutsche Bank in Tokyo. "Unless this trend collapses, the dollar will stay firm."
Still, Treasuries steadied on Wednesday after Tuesday's sharp sell-off, easing some worries that the steep rise in yields could hurt the economy and giving Wall Street stocks a boost. Although China's main stock index lost ground, equities in Japan and India recovered on Thursday, giving respite to investors holding risky positions such as carry trades, in which low-yielding currencies such as the yen are used to buy higher-yielding assets overseas.
The dollar rose as high as 122.83 yen on electronic trading platform EBS, the highest level since December 2002. It later pulled back to 122.75 yen, holding near levels in late US trading on Wednesday.
The euro was steady at $1.3312 having plumbed an 11-week low of $1.3264 on Wednesday on EBS. The single European currency was little changed at 163.42 yen up from a one-month low of 161.51 yen hit the previous session.
With few data releases or economic events on Thursday, traders await US inflation data on Friday to gauge price pressures in the world's biggest economy, analysts say. Expectations for the Federal Reserve to cut interest rates are receding following recent rosy US data on jobs, manufacturing growth and retail sales.
Market players are keeping an eye on the Bank of Japan's two-day policy meeting that start on Thursday. The BoJ is widely expected to keep rates on hold at 0.5 percent.
With expectations running high for a BoJ rate hike in August, investors will closely watch a news conference by BoJ Governor Toshihiko Fukui on Friday after the meeting wraps up for clues on the policy outlook.
"I expect Fukui to say how he views rising interest rates around the world, while making the same old optimistic remarks about the economy's outlook as usual," said Daisuke Uno, market strategist for Sumitomo Mitsui Banking Corp Even though the BoJ is widely seen lifting rates to a 12-year high of 0.75 percent in coming months, this expectation has done little to help the yen.