The dollar steadied against the euro on Friday as investors awaited US economic data that may shed more light on whether the Federal Reserve will continue to cut interest rates.
The yen recovered from a 2-1/2-month low hit versus the euro on Thursday and rose against other high-yielding currencies like the Australian and New Zealand dollars as a slide in Asian stock prices prompted traders to book profits on short-term bets favoring those currencies against the yen.
Data on September retail sales and producer prices at 08:30 am New York time will be scrutinized for clues about the health of the U.S. economy, after the Federal Reserve slashed interest rates by an aggressive 50 basis points to 4.75% in September.
The odds of an additional cut this month have receded somewhat, but investors see a roughly 70% chance of more easing this year.
"US data released later this session is likely to decide the direction of the dollar from here," said Mitsuru Sahara, senior vice president of forex dealing at Bank of Tokyo-Mitsubishi UFJ.
"The market's focus is whether today's economic reports change expectations for a Fed rate cut in October and December," Sahara said.
Economists expect retail sales to have risen 0.2% in September, following a 0.3% increase in August. Excluding cars, sales are expected to pick up 0.3%.
If retail sales data is much weaker than expected, that could revive expectations for an October rate cut, analysts said.
The euro traded slightly lower against the dollar from late US trade on Thursday.
The euro has bounced back from a two-week low of around $1.4015 struck on Tuesday, and crawled towards a record high of around $1.4280 hit earlier this month.
The euro zone currency retreated from a 2 1/2-month high around 167.65 yen hit on Thursday, to trade little changed versus the Japanese currency as some traders unwound risky yen carry trades as the Nikkei 225 Average ended about 0.75% lower, following other Asian stocks down.
Such unwinding of trades that involve selling the low-yielding yen for assets in higher-yielding currencies pushed the Australian and New Zealand dollars down against the Japanese currency.
The dollar was flat against the yen retreating from a two-month high of 117.79 yen hit on electronic trading platform EBS on Thursday.
G7 Caution
Despite the yen's gains on Friday, market participants said the currency would stay on the back foot after the Bank of Japan kept interest rates at 0.5%, which will likely fuel market expectations that rates will stay low for a while.
Some analysts said that this, combined with a broad recovery in global stocks after the financial-market volatility of the past few months, may reheat longer-term demand to sell the yen for high yielders.
Meanwhile, despite the euro's overall winning streak this week, one trader said that more significant gains may be capped on speculation that finance officials from Group of Seven nations may express their displeasure with euro strength at a gathering next week.
"There are some concerns that euro strength may be an issue at the G7 meeting," said Kimihiko Tomita, head of foreign exchange at State Street Bank in Tokyo.
He added that while it was unlikely the G7 would directly address euro strength in its communique, some traders were using such caution as an opportunity to take profits on yen carry positions.