The dollar extended gains against the yen on Friday after the Federal Reserve repeated its worries about stubborn price pressures, reinforcing expectations that the central bank will stand pat on interest rates for some time.
The yen fell slightly after data showed that Tokyo-area core consumer prices unexpectedly dipped 0.1 percent in June from a year earlier, casting doubt on how soon inflation may return.
Japan's nation-wide core CPI also slid 0.1 percent in May from a year earlier, in line with forecasts and reinforcing expectations for gradual Bank of Japan interest rate rises. That view made speculators feel comfortable about yen carry trades - borrowing the low-yielding Japanese currency to buy higher-yielding currencies or higher-return assets.
"With volatility in the dollar/yen falling, conditions in the market are favouring yen carry trades again," said Mitsuru Sahara, a senior trader at Bank of Tokyo-Mitsubishi UFJ. "It looks like there will be another round of yen selling soon."
Market players expect the BOJ to lift rates to a 12-year high of 0.75 percent from the current 0.5 percent as early as August, but such a move would still keep Japanese rates the lowest among industrialised countries.
The dollar rose 0.2 percent from late US trade to 123.40 yen clawing towards a 4-1/2-year high of 124.14 yen hit last week on EBS. The euro rose 0.2 percent to 165.87 yen moving back near an all-time high of 166.94 yen hit last week. The single European currency was flat near $1.3445.
The euro was weaker across the board as investors booked profits on the last trading day of the second quarter, traders said. The euro hit a four-month low against the sterling of 67.09 pence. The dollar was supported after the Fed said on Thursday its main concern was that inflation might fail to moderate after it held interest rates steady at 5.25 percent.
Some saw the Fed's post-meeting statement as a bit hawkish because the Fed did not express concerns about the US housing market or the troubled subprime mortgage sector. In a Reuters poll of primary dealers, nine out of 17 expected the central bank to stay on hold at least through this year, and an equal number said the Fed's next move would be a rate cut. Five said the Fed's next move would be a rate hike.
Japanese Finance Minister Koji Omi made no comments on foreign exchange rates on Friday at a regular press conference after causing a stir earlier this week by saying the market should be aware of the risks of one-way bets, an apparent reference to yen carry trades.
Carry trades have been a big force behind the yen's broad slide to an all-time low against the euro, a 20-year low against the New Zealand dollar and a 16-year low against the Australian dollar - all struck last week.
The New Zealand dollar edged up to 94.92 yen just shy of its 20-year peak. The kiwi has risen about 6 percent in June versus the yen and 13 percent in the April-June quarter. Against the US dollar, the kiwi was up 4.5 percent in June.