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Dollar Holds Near Highs on Strong U.S. Economic Reports

The dollar held near a three-month high against the yen after a regional survey showed an unexpectedly large rise in U.S. business activity, backing a view that interest rates will stay on hold for some time.

The strong reading in the Philadelphia Federal Reserve's business activity index for May followed data showing that initial filings for U.S. state unemployment insurance aid fell for the fifth straight week.

Analysts said the data backed a view that the U.S. manufacturing sector is on the mend after a recent slowdown, and that the Fed will not cut interest rates from the present level of 5.25% until at least late this year.

"Goldilocks-like numbers from the Philly Fed should be helpful for risky assets, and mildly positive for the dollar," Alan Ruskin, chief international strategist at RBS Greenwich Capital, wrote in a note to clients.

The dollar was up versus the yen , after earlier touching 121.36 yen on electronic trading platform EBS, its highest level in around three months.

The yen's weakened after the Bank of Japan left interest rates at 0.5% as expected earlier in the session, following data that showed the Japanese economy grew at a slightly softer-than-expected pace in the first quarter.

Analysts expect the BOJ to raise rates to 0.75% as soon as August or September. However, by that point they also expect the European Central Bank, and possibly the Bank of England, to have raised borrowing costs as well, sapping the yen of any added advantage in attracting yield-hungry investors.

The euro was trading down , almost two cents below a record-high struck last month. The currency made several attempts to break below $1.3480, where traders said big buyers were blocking its fall.

"I think given the magnitude of buying interest in the 1.3480-85 area, people were reluctant to get too aggressive in selling the euro again after the Philly Fed data," said George Davis, senior strategist at RBC Capital Markets in Toronto.