The dollar slipped against the euro Friday on tame inflation data, but rallied to a four-and-a-half-year high against the yen after the Bank of Japan indicated it was in no hurry to raise interest rates.
The greenback has reached fresh highs against the yen for the last three days and is on pace for its biggest weekly gain this year.
The euro was following reports showing core consumer prices, which exclude food and energy, rose in May at the slowest pace since March 2006, factory output slowed and consumer confidence dropped more sharply than expected. In intraday trading it was the euro's biggest one-day gain against the dollar since April.
The data has capped a dollar rally that has been largely fueled by U.S. Treasury yields climbing this week to five-year highs, which outpaced the rise in yields of other major government debt.
"Bond yield developments have been driving other markets for the past week or so, and an easing in yields should equate to a softer dollar," said Nick Bennenbroek, head of currency strategy with Wells Fargo in New York.
Over the past month, data has hinted at a rebound in U.S. growth, and traders of interest rate futures priced out expectations of an interest rate cut by the Federal Reserve. In March, dealers priced in nearly three quarters of a percent in cuts.
Despite Friday's pullback in the dollar, many analysts anticipated strength in the currency next week.
"With a marginal improvement in the U.S. interest rate picture, we will need to get back below 5% on the 10-year (Treasury note) before people will think the dollar will get weaker," said Joe McCarthy, head of foreign exchange trading at ING Capital Markets in New York.
Against the yen, the dollar rose to a high of 123.66 yen before surrendering some gains .
Japan's interest rates, which at 0.5% are the lowest in the developed world, continue to weigh on the yen, especially after the Japanese central bank ended a policy meeting with no clear signals of a forthcoming rate increase.
The euro touched a record high of 165.27 yen, according to electronic platform EBS. The euro later surrendered some gains to trade at .
Structurally Sound?
Though currency investors continue to be focused primarily on milking yield out of differences in interest rates between various currencies, data released on Friday showed a long-term weakness in the dollar has improved somewhat.
A report showed the U.S. current account deficit widened in the first quarter but by less than expected to $192.58 billion from $187.94 billion in the fourth quarter of last year.
Also, the deficit for 2006 was revised down by $45 billion to $811.48 billion.
While still massive -- the 2006 shortfall was equal to 6.1% of U.S. gross domestic product -- the current account gap appeared to be stabilizing below $200 billion on a quarterly basis.
Also, a separate report showed long-term net capital flows into the United States rose in April to $84.1 billion, the highest since January, driven by record net foreign purchases of U.S. stocks by private investors.
