The dollar slipped on Thursday after tame US consumer price data fed speculation that inflation risks were subsiding, which could prompt the Federal Reserve to keep interest rates on hold next month.
The dollar was dealt a blow on Wednesday from only a slight rise in the core consumer price index for July that came on the heels of surprisingly weak producer price data a day earlier.
Both sets of figures stirred expectations that the Fed could forego bumping up rates when it next meets in September, which would be the second straight pause.
"Coming after the weak PPI figures, the CPI data keeps intact speculation that the Fed could pause again on rates, which is driving a bit more selling in Tokyo," said Mitsuru Sahara, senior vice president of forex trading at Mitsubishi UFJ Bank.
Meanwhile, the euro firmed against the dollar and hovered near a record high touched against the yen in the previous session.
Traders and analysts said that while the chances of a Fed pause weighed on the dollar because it would likely cut the dollar's yield advantage as other currencies' rates rise, it was too early to say that US rates will stop climbing in the near future.
"The possibility that the Fed won't raise next month is increasing, but we're still going to have to look at upcoming data to arrive at a final conclusion," said a trader at a Japanese trust bank.
The Fed left rates on hold at 5.25 percent last week after pushing them up 17 straight times since June 2004, though it left the door open for more credit tightening if price pressures persist.
The dollar dipped around 0.2 percent to 115.65 yen hovering near the session low of 115.57 yen, according to dealers.
It was sold after data on Wednesday showed core CPI in July inched up 0.2 percent from a month earlier, below forecasts for a 0.3 percent rise and after gaining 0.3 percent in each of the previous four months.
As participants start to trickle back into the Tokyo market following the peak summer holiday season, traders said they would be on the lookout for whether investors further shorten dollar positions given the currency's losses so far this week.
The euro inched up to $1.2850 from $1.2840 in late US trade. This week's US inflation readings have helped to push the dollar down from around $1.27 per euro since Monday.
"The euro has more scope to rise against the dollar," said Hideki Hayashi, global strategist at Shinko Securities. "That is limiting the yen's gains against the dollar as a result."
Losses in dollar/yen helped to support the Japanese currency on the crosses, prodding the euro down to around 148.65 yen
Still, the single European currency stayed in range of a record high of 148.89 yen touched on electronic trading board EBS on Wednesday. The euro has been climbing against the yen in the past few months on expectations that the European Central Bank will raise rates faster than the Bank of Japan.
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