The dollar climbed to a fresh five-month high against the yen on Tuesday on expectations that this week's US jobs data would support the case for more aggressive rises in interest rates. But despite gains against the yen, the US currency eased versus the euro as traders took a breather from a rush of buying that pushed the dollar to a six-week high on Monday. The dollar rose to 107.38 yen according to electronic trading system EBS, its highest level since late October, helped also by last minute buying by Japanese importers ahead of the fiscal year-end on Thursday.
"When the key interest rate of a major currency is expected to reach 4 or 4.25 percent by the end of December, it's easy to buy," said Mitsuru Sahara, senior vice president of the forex dealing group at UFJ Bank.
"This isn't the Russian rouble or the Polish zloty we're talking about. It's about the interest rate of the dollar."
Most market players expect the Federal Reserve to keep raising the benchmark federal funds rate, with some forecasting a rise to around 4 percent by the end of 2005, from the current 2.75 percent.
The dollar has rallied in the past week after the Fed suggested in its post-meeting statement that it might raise rates more aggressively if inflation heats up.
The dollar was back down at 107.15 yen, little changed from the level in late US trade.
The euro was at $1.2935, up from $1.2897 in late New York trade and off a six-week low of $1.2857 hit on Monday.
It fetched 138.55 yen versus 138.22 yen. The single European currency hit the day's high of around 138.75 yen as a 1.6 percent tumble in the Nikkei stock average sent dealers buying the euro against its Japanese counterpart.
Sterling and the Swiss franc, which fell to six-week lows against the dollar the previous day, tracked the euro's rise and also recovered some of their losses.
Dealers say the main focus of the market was the US payrolls report due on Friday. Data is expected to show that 220,000 new jobs were created in March, down from 262,000 in February, which was the biggest gain in four months.
The market was also looking ahead to Friday's Bank of Japan tankan survey of business sentiment, and some analysts said that recent dollar gains were due to speculators factoring in the possibility of an uninspiring reading.
A Reuters poll gave a median forecast of 23 for the headline diffusion index for large manufacturers, only one point higher than the 22 posted in the previous survey.
Such a reading could further deflate optimism that Japan's economy has overcome a soft patch, particularly after data released on Tuesday showed a rise in Japan's unemployment rate to 4.7 percent in February from 4.5 percent the previous month.
"The US interest rate factor is supporting the dollar, as is yen selling in preparation just in case the tankan comes in soft," said Osamu Takashima, chief forex analyst at Bank of Tokyo-Mitsubishi.
Still, a poll of business conditions by small- and mid-sized Japanese companies on Tuesday produced a DI of 49.3 in March, up from 47.6 in February, and some analysts said the reading could be considered an optimistic prelude to the tankan.
Meanwhile, chart followers said the dollar was approaching crucial technical levels against the yen, after successfully breaking resistance at 106.86 yen on Monday.
A downtrend line drawn from a peak of 135.20 yen, hit in January 2002, lies in the mid 107 yen-level and a break above that level could signal an end to the three-year decline of the dollar, they said.
"I may have to change my view on the dollar if it rises above 108 yen," said a senior trader at a US bank.