The dollar was broadly higher on Tuesday, posting steep gains against the yen, which slipped across the board as investors remained convinced Japan will continue near-zero interest rates for a long time to come.
Data showing that Japan's consumer prices rose for the first time in two years last month did little to boost sentiment on the yen in a holiday-thinned market.
"After a couple of weeks of yen strengthening against the dollar ... ahead of the year-end to book some profits (on the dollar), I think the fundamental trend is re-establishing itself here," said Alex Beuzelin, senior market analyst at Ruesch International in Washington.
"Japan's negative yield differentials will continue going forward and therefore the yen will remain the funding vehicle of choice for investments in higher-yielding currencies. So the yen will continue to be shunned because of its low, unappealing yield," he added.
In late trading, the dollar was up over 1 percent against the yen from late Monday at 117.39 yen, while the euro chalked up sharp gains to trade at 138.88 yen.
The euro dipped 0.1 percent against the dollar to $1.1831 and sterling was down 0.3 percent at $1.7276.
The dollar was changing hands against the Swiss franc at 1.3169 francs, up 0.3 percent on the day.
There was no particular news propelling the dollar higher on Tuesday, but rather a continuation of the currency's generally bullish performance this year and the yen's broad-based weakness provided a positive backdrop.
"Slowly but surely the dollar, is making a strong statement," said a senior dealer at a bank in New York. "The dollar, on the whole, is quite strong in a quiet session."
Volumes are light, with London and other financial centers closed on Tuesday.
The tone for broad-based yen weakness was set earlier in the global session after data showed that core consumer prices in Japan, excluding fresh food prices, edged up 0.1 percent in November from the previous month.
Japanese jobs data on Tuesday also showed the country's seasonally adjusted unemployment rate rose to 4.6 percent in November.
Japan's Finance Minister Sadakazu Tanigaki said the report appeared to reflect market opinion that the data showed Japan's economy still battling deflation.
The effect of these generally soft economic numbers on the yen may have been compounded by market positioning, following the massive unwinding of short yen positions recently.
According to the latest speculative positioning data from the International Monetary Market, bets against the Japanese currency in the week to December 20 were slashed to their smallest since early May.
The implication here is that with positioning at more neutral levels, investors can feel more confident in going short, or selling the yen without fear of being caught out by a snap bout of short-covering.
Meanwhile, the brief inversion of the US yield curve - where two-year Treasury yields are higher than 10-year yields - earlier in the session garnered little attention in currency circles.
An inverted yield curve has often preceded an economic slowdown, sparking worries that the US economy may soon lose steam. But some analysts suggested an inverted yield curve could be positive for the dollar.
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