The dollar rose against the yen on Tuesday as a modest improvement in risk appetite encouraged investors to buy stocks, but it consolidated versus the euro after recent hefty gains.
Traders said volumes were thin as investors scaled down their activity into the end of the year, leading to jittery trading heavily influenced by technical factors and flows.
The dollar has benefited over the past week from unexpectedly strong U.S. retail sales and inflation data, which fanned speculation that the Federal Reserve may be less aggressive in cutting interest rates next year.
However, the latest Reuters poll still shows a 40 percent chance of a U.S. recession next year.
"It seems that the yen continues to follow equity markets. The euro experienced a sharp decline from its highs against the U.S. dollar so there is no surprise that it would end up stalling towards the mid-1.43s," said Mark Meadows, currency strategist at Tempus Consulting in Washington.
There is a negative correlation between stocks and the yen and investors tend to price their risk perceptions in the stock market which is more transparent.
In New York morning trade, the dollar was up 0.4 percent at 113.25 yen as U.S. equities opened higher, tracking stronger global peers and cheered by fourth-quarter profits from Goldman Sachs that exceeded the consensus forecast.
The euro was up 0.1 percent at $1.4419.
"We are not expecting too much to come in here to change things. The profit-taking seems to have subsided on those individuals who were short U.S. dollars and that seems to be end of the story until early next year," said Meadows.
The market was little moved by a report showing that U.S. home building projects declined as expected in November, with analysts saying that the data did not change views that the housing sector would lead the economy into slower growth.
According to the latest Reuters poll, the Federal Reserve is expected to cut its benchmark overnight lending rate twice by 25 basis points to 3.75 percent in the first half of 2008 and leave monetary policy unchanged for the rest of the year.
This would probably support the dollar as some major central banks are expected to either cut or hold interest rates steady.
Sterling fell 0.1 percent to $2.0188 after UK inflation data came in below expectations, leaving the door open for more Bank of England rate cuts in 2008.
Softer-than-expected core inflation drove the dollar to a session peak against the Canadian currency as the report provided more evidence that the Bank of Canada could again ease monetary policy next year. The dollar last traded up 0.3 percent at C$1.0087 .
Investors are also awaiting the outcome of this week's liquidity injection plans by top central banks. The results of the liquidity measures are due on Wednesday.
"With most leveraged positions financed in dollars, European financial institutions may still have to move liquidity from euro (and sterling) into dollars," said Niels From, Dresdner Kleinwort in London.
"As liquidity dries up ahead of Christmas such flows may have an unusually large impact on the dollar."