The dollar rose to a fresh 4-1/2-year high against the yen for a second straight day ahead of a Bank of Japan policy meeting and a report on U.S. consumer inflation that could determine whether U.S. Treasury yields extend a six-week climb.
Since April, the benchmark 10-year U.S. Treasury note yield has risen nearly 60 basis points as dealers priced out any chance of a Federal Reserve interest rate cut this year, helping the dollar also rally from record lows against the euro.
Globally bond yields have been rising on expectations economic growth will be solid and central banks around the world will have to continue to raise interest rates to contain inflation.
But the pace at which Treasury yields have been rising has outstripped other major economies, offering foreign investors more of an incentive to put their money into dollar-denominated assets.
A report released Thursday showed that on a year-on-year basis, the U.S. core producer price index was up 1.6% in May compared with 1.5% in April, leaving open the possibility that Friday's consumer inflation data could reflect upward pressures. Core prices exclude food and energy costs.
"This data feeds the market's mood swing," said Greg Anderson, senior currency strategist with ABN AMRO in Chicago.
"This morning's wholesale inflation data was marginally dollar positive as it highlighted lingering potential inflation risk and compounded the view the Federal Reserve will not cut interest rates this year," said Alex Beuzelin, senior market analyst at Ruesch International in Washington.
The dollar peaked at 123.13 yen, the highest since December 2002 and 3.3% higher than at the start of the year.
The euro was largely unchanged against the dollar . Against the yen, the euro climbed .
"Critical support for euro/dollar comes in the $1.3250-70 area and we will find out if there is indeed a floor there ... if we get CPI tomorrow that's as big a surprise, we could test lower levels," said ABN Amro's Anderson, of the Consumer Price Index.
The dollar rose for the sixth consecutive session against the Swiss franc .
The franc, one of the lowest-yielding major currencies, received no boost from a widely expected interest rate increase or from upward revisions to the Swiss National Bank's growth
and inflation views.
The Australian dollar was one of the biggest movers on the day among major currencies after the governor of the Reserve Bank of Australia said the favorable near-term inflation outlook gave the bank more time to assess the need for higher interest rates.
The Bank of Japan is widely seen keeping rates at 0.5% Friday, but with expectations running high for a rate hike in August, investors will closely watch the post-meeting news conference by BoJ Governor Toshihiko Fukui.
A Reuters poll showed economists expect the BoJ to raise interest rates to 0.75% in August and then again early next year to 1% -- which would still leave Japan's rates among the lowest in the world.
A string of stronger-than-expected readings on the U.S. economy in the last several weeks, including the highest retail sales growth since January 2006, has lifted growth expectations
and sparked some concerns about inflation.
Above-forecast May U.S. CPI data could lead markets to lift Treasury yields and hammer the low-yielding yen against the resilient dollar.
"The combination of stronger consumer spending and higher inflation will keep the Federal Reserve hawkish, which should continue to fuel demand for carry trades," said Kathy Lien, chief strategist with Forex Capital Markets in New York, referring to the trade where investors borrow cheaply in yen to invest in higher-yielding currencies.