The yen rose against the euro and dollar on Tuesday after data showed Japan's economy grew more than expected in the third quarter, keeping the Bank of Japan on track to raise interest rates in the next few months.
The world's second-largest economy expanded at a 2 percent annual rate in the July-to-September quarter, double forecasts, while growth for the previous quarter was revised up to a 1.5 percent annualised pace from 1.0 percent previously.
Analysts said the surprisingly strong data kept alive the possibility of the BoJ lifting rates by the end of the year from 0.25 percent now, although most market players see the central bank waiting until January or February for a move.
The data gave investors an excuse to adjust their short yen positions, built up as part of carry trades - when the yen is borrowed cheaply to fund investments in assets of other, higher-yielding countries.
"I think that the market is more or less expecting another hike this year," Henrik Degrer, currency analyst at SEB Merchant Banking in Stockholm. "But I am surprised it (the GDP) didn't affect the yen more. It says something of the underlying weakness of the yen through carry."
Other analysts however said that the details of the GDP release - showing a fall in private consumption - were the key factor keeping a lid on the yen's gains. By 1235 GMT the yen was up 0.4 percent on the day at 117.69 per dollar. It was also 0.2 percent firmer versus the euro at 150.90 yen, recovering from a record low around 151.50 yen hit last week.
The yen's gains were tempered after China's central bank said it would use a broad array of tools to keep credit growth in check. But the currency reaction was muted as the People's Bank of China had next to nothing to say about the yuan.
The euro was up 0.15 percent at $1.2820, having hit a 2-1/2 month high of $1.2900 last week. The single European currency briefly pared gains after data showing the euro zone economy grew less than expected in the third quarter and a below-forecast expectations index in the German ZEW survey for November.
But the reaction proved short-lived and the numbers did little to change expectations for another European Central Bank rate hike to 3.5 percent next month. "The GDP number had been pretty well foreshadowed by the country releases so the market was primed for a downward surprise, and on the ZEW data I think the market is becoming increasingly sceptical," said Adam Cole, senior currency strategist at RBC Capital Markets.
In the United States, Tuesday sees the release of producer prices and retail sales data for October, which may provide indicators to whether the Federal Reserve will leave interest rates on hold at 5.25 percent for some time.
"Retail sales will be closely watched today in the US as reduced consumer spending on the back of a weaker housing market is one trigger to help force the Fed to cut interest rates in Q1 next year," UBS said in a note to clients. St Louis Fed President William Poole and San Francisco Fed President Janet Yellen are scheduled to speak in separate events later in the day.
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