The dollar held near a four-year peak against the yen on Wednesday as investors waited for a Federal Reserve policy statement due later in the session for clues on the course of US interest rates.
The US central bank is widely expected to keep interest rates unchanged at 5.25 percent when it concludes its two-day meeting later this session, and traders are looking for signs of greater economic optimism. Recent solid data has helped cool speculation the Fed may cut interest rates this year, with traders looking ahead to a slew of indicators this week to gauge the strength of the US economy.
"Market sentiment about the economy and the interest rate outlook has changed, and it is now trying to push the dollar higher from current levels," said a dealer at European bank. Data due later in the session includes fourth-quarter gross domestic product and the employment cost index. Economists expect GDP to show annualised growth of 3.0 percent in the fourth quarter, up from 2.0 percent in the third quarter.
The growth data will be followed by manufacturing activity figures on Thursday and key jobs data on Friday. Traders said the dollar's support looks firm but its rise may slow against the yen as investors become more cautious ahead of a meeting of finance ministers and central bankers from the Group of Seven industrialised nations next week.
The dollar slipped slightly to 121.50 yen from late US trade but held near the 122.20 yen hit on Monday, its strongest since December 2002. The euro also dipped to 157.50 yen from near 157.70 yen in late US trade, not far from a record high of 158.62 yen struck last week.
The single European currency was flat on the day near $1.2960. The yen remains under pressure as generally soft data this week reinforced doubts about the likelihood of the Bank of Japan's raising interest rates next month from 0.25 percent.
But the concerns expressed by European policy-makers about the yen's weakness before the G7 have prompted some market players to unwind big positions betting against the Japanese currency. In an interview with the Nikkei financial daily published in Japanese on Wednesday, Bank of France Governor and ECB Governing Council member Christian Noyer said a weak yen would create strains in the global economy in the medium term, but added that the market was likely to correct itself.
German Finance Minister Peer Steinbrueck said on Tuesday that the yen's weakness against the euro would be discussed at the G7 meeting on February 9-10 in Essen, Germany. European finance ministers have voiced worries about the yen's broad weakness, but traders remained sceptical whether the G7 would take any action other than repeating their concerns.
Upbeat euro-zone growth prospects will likely keep the European Central Bank on a course of monetary tightening, and higher yields will maintain the euro's appeal over the yen.