The U.S. dollar rose to a 10-week peak against the yen on Thursday as markets grew more confident about a patient approach by the Federal Reserve to further monetary easing, even as a key inflation report loomed later in the day.
The dollar index, which measures the currency against six key rivals including the yen, stuck close to an almost two-month top touched overnight, as traders further pared bets for U.S. rate cuts this year after last week's unexpectedly strong payrolls data.
The euro languished near its lowest since Aug. 13 against the dollar.
September's consumer price index (CPI), due at 1230 GMT, is likely to show core U.S. inflation holding steady at a 3.2% year-on-year clip, economists polled by Reuters said.
The "U.S. exceptionalism trade" has reignited on the back of the recent spate of strong jobs data, said Kyle Rodda, senior financial markets analyst at Capital.com.
Minutes from the Fed's latest meeting, released overnight, confirmed the central bank's focus on keeping the labour market healthy.
"The U.S. dollar is regaining supremacy ... mostly because of continued U.S. economic outperformance", Rodda said.
At the same time, "an upside surprise in U.S. CPI could force the Fed to doubt its confidence about the path for inflation."
San Francisco Fed President Mary Daly said late on Wednesday that she was less concerned now about resurgent inflation than about hurting the labour market.
Traders lay 85% odds on the Fed cutting rates by 25 basis points at its next policy decision on Nov. 7, and a 15% probability of no change, the CME Group's (NASDAQ:CME) FedWatch Tool showed.
A week earlier, the probability of a quarter-point cut stood at 65%, with 35% odds for a half-point reduction.
The dollar index was little changed at 102.89 by 0500 GMT, only slightly below Wednesday's high of 102.93, a level last seen on Aug. 16.
The U.S. currency edged up to 149.40 yen, and earlier touched 149.54 yen for the first time since Aug. 2.
The euro was flat at $1.0940 following its dip to $1.0936 in the previous session.
"There is a limit to how much more pricing for interest rate cuts can be removed without strong guidance by senior Federal Open Market Committee (FOMC) officials," said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia (OTC:CMWAY), who forecasts 50 basis points of cuts over the year's two remaining Fed meetings.
The risk-sensitive Australian dollar gained 0.32% to $0.6740, buoyed by an equity rally in top trading partner China as the East Asian nation's central bank launched a swap programme aimed at supporting the stock market.
China's finance ministry is due to hold a highly anticipated news conference on fiscal policy on Saturday.
The Aussie dropped to its weakest since Sept. 16 at $0.6708 on Wednesday, after a stimulus announcement by China's state planner fell flat.
New Zealand's dollar rebounded 0.43% to $0.6089, but after plunging 1.19% to a three-week low at $0.6053 on Wednesday, when the central bank cut rates by a half point and hinted at further easing ahead.
Source: Investing