The dollar rose from recent one month lows against major rivals on Tuesday as investors took profits, spurred by signs that US consumer demand is firm and that the Federal Reserve would not rush to cut interest rates.
Against the yen, the dollar's gains were boosted after a closely watched Bank of Japan report did little to change market expectations that the central bank would wait until next year to raise Japanese borrowing costs. A senior Japanese government official also said the BoJ should not discuss rate hikes unless core CPI growth exceeds 0.5 percent.
Most analysts expect the next move in US interest rates to be down from the current 5.25 percent. But data on Monday showed that US consumers boosted their spending last month, suggesting no need for a growth-boosting rate cut yet.
"The Federal Reserve will not be changing rates anytime soon. They will be on hold for the next few months and so the impact of interest rates on the dollar from the US side will be neutral," Standard Chartered currency strategist Marios Maratheftis said.The rates-on-hold view got further support from Richmond Fed President Jeffrey Lacker saying inflation is still too high. Lacker's comments and the personal consumption data sparked a recovery in the dollar which had sunk to one-month lows against a basket of currencies last week on the back of softer than expected third quarter GDP data.
By 1250 GMT, the dollar was up around a third of a percent on the day at $1.2694, bouncing from Friday's four-week low of $1.2750. It also gained 0.3 percent against the Swiss franc to 1.2518.
Euro zone consumer price inflation came in below expectations for October, but analysts said the weaker numbers were likely to be a temporary phenomenon. Further clues on the US monetary policy outlook could come with October consumer confidence at 1400 GMT. The index is forecast to pick up to 108.0 in October from 104.5 the previous month.
The dollar was at 117.92 yen, up from around 117.35 yen just before the release of the BoJ report and 0.4 percent stronger from late New York levels. The euro was a touch firmer at 149.62 yen.
In its twice-yearly outlook on the economy and prices, the BoJ reiterated it would gradually adjust rates based on economic and price conditions, a message that was echoed by BoJ Governor Toshihiko Fukui.
"...The (BoJ's) projections are consistent with a further withdrawal off monetary stimulus and a December rate hike remains a possibility, contingent on upcoming data releases," RBC Capital markets said in a note to clients.
The BoJ kept overnight rates at 0.25 percent as widely expected. Data earlier in the session showed Japan's unemployment rate ticked up in September, and household spending fell much more than expected.
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