The dollar gained across the board Friday after stronger data from the U.S. housing and manufacturing sectors provided further evidence the economy is more resilient than many initially thought.
That should further reinforce the view the Federal Reserve may hold interest rates steady at 5.25% this year, and not cut them as previously expected.
"The data was pretty good overall. Durables surprised to the upside and December home sales may have been weather-related but this is giving us some hope that the housing market correction will not be much deeper," said Carl Forcheski, vice president of corporate foreign exchange at Societe Generale in New York.
The dollar rose after a government report showed that while new-home sales posted their biggest drop in 16 years in 2006, sales picked up in December. That followed a report on new orders for U.S.-made durable goods, which increased by a larger-than-expected 3.1% in December.
"These have supported the dollar because they have pushed out expectations of a rate cut in the middle of the year which had been universally expected up until a month ago," Forcheski added.
Interest rate futures Friday continued to suggest that the Federal Open Market Committee will hold the fed funds rate unchanged at next week's meeting and potentially for the whole of 2007. They also showed a slim chance of a rate hike by June.
The yen has already given up nearly all its hefty gains made in the last two days against the dollar when investors rushed to reverse extreme short positions and unwind carry trades. The yen's rally came amid speculation the weak Japanese currency could be discussed at next month's Group of Seven meeting.
Any sharp appreciation of the yen could erase profits from carry trades, where investors borrow in low-yielding currencies like to buy assets in countries with higher interest rates.
But after digesting a barrage of comments from European and Japanese officials, most analysts concluded for now that the Feb. 9-10 summit would not yield a group statement on the yen.
"The one currency that's done well this week against the yen is the dollar," said Joe Francomano, vice president for foreign exchange at Erste Bank in New York. "But I wouldn't ignore the fact that EU officials are concerned -- not alarmed -- but concerned about the yen."
Analysts said demand for yen started to wane in Asian trading as soft Japanese inflation figures cast doubt on whether the Bank of Japan will raise rates next month.
Japanese core consumer prices rose just 0.1% in December from a year earlier, suggesting Japan is struggling to shake off a decade of deflation and adding to speculation the BOJ may keep rates at 0.25% at its February meeting.
Elsewhere in the market, the dollar rose against the Swiss franc, but fell versus the sterling.