The dollar stayed near a four-year high against the yen after reports showed U.S. housing starts unexpectedly strengthened and consumer prices jumped at the sharpest rate in eight months, bolstering views U.S. interest rates are not headed lower any time soon.
The Consumer Price Index for December rose for the first time since August, while the pace of U.S. home construction climbed 4.5% in December, a second-straight increase that ran contrary to analyst expectations. An unexpected drop in jobless claims and a surprise jump in the Philadelphia Federal Reserve's business activity index rounded out the bullish economic data.
The yen was already trading near a four-year low against the dollar after the Bank of Japan kept interest rates on hold at the lowest level in the industrialized world.
But the economic data weren't enough to maintain the dollar's early gains against the euro and sterling.
"The numbers were strong today, and the Philly Fed is the latest, but the dollar just cannot rally," said Tim Mazanec, Senior Currency Strategist with Investors Bank & Trust. "Despite the fact that the numbers have been strong this year, including everything that's come out today, it doesn't change the interest rate outlook much, and there's no case to say you need to be in dollars right now."
The BOJ's decision to hold rates at 0.25% in a 6-3 vote confirmed a big shift in expectations in the past two days after a flurry of reports doused widespread views that a rate rise to a decade-high of 0.5% was coming this week.
Even if the BOJ had lifted rates, many analysts believed a move would provide little relief to the yen because short-term Japanese interest rates remain so much lower than those of other
currencies and the BOJ has pledged to lift rates only gradually.
Analysts said the decision added further gusto to investors' current preference; using the yen as a funding currency to purchase units with a higher return.
"Japanese retail investors are looking offshore for returns and overseas investors are using the currency for carry trades. We are revising our forecasts and see yen hitting the mid 120s
against the dollar," RBC Capital Markets senior currency strategist Adam Cole said.
The decision also raised questions about whether the BOJ had bowed to government pressure against a shift. Japan's economics minister Hiroko Ota said the BOJ and government both held the view that prices and consumption were somewhat weak.
Finance minister Koji Omi said the rate decision was fine and denied the government or politicians put pressure on the BOJ.
Sterling jumped to 239.80 yen - its highest since August 1998.