The dollar held near a three-month high against the yen on Thursday after a regional survey showed an unexpectedly large rise in US business activity, backing a view that interest rates will stay on hold for some time.
The strong reading in the Philadelphia Federal Reserve's business activity index for May followed data showing that initial filings for US state unemployment insurance aid fell for the fifth straight week.
Analysts said the data backed a view that the US manufacturing sector is on the mend after a recent slowdown, and that the Fed probably will not cut its benchmark interest rate from 5.25 percent until at least late this year.
"Goldilocks-like numbers from the Philly Fed should be helpful for risky assets, and mildly positive for the dollar," Alan Ruskin, chief international strategist at RBS Greenwich Capital, wrote in a note to clients.
The dollar was up 0.45 percent at 121.30 yen in late afternoon trade in New York, after earlier touching 121.37 yen on electronic trading platform EBS, its highest level in around three months. The yen also weakened against the euro, with the single European currency rising 0.3 percent to 163.70 yen, not far off a record high of 163.90 touched on Wednesday.
The yen weakened after the Bank of Japan left interest rates at 0.5 percent as expected earlier in the session, following data that showed the Japanese economy grew at a slightly softer-than-expected pace in the first quarter.
Analysts expect the BOJ to raise rates to 0.75 percent as soon as August or September. However, by that point, they also expect the European Central Bank, and possibly the Bank of England, to have raised borrowing costs as well, keeping the yen at a disadvantage in attracting yield-hungry investors.
The euro was trading down 0.2 percent on the day at $1.3495, almost 2 cents below a record-high struck last month. The currency made several attempts to break below $1.3480, where traders said big buyers were blocking its fall.
It fell as low as $1.3477, but quickly rebounded. "I think given the magnitude of buying interest in the 1.3480-85 area, people were reluctant to get too aggressive in selling the euro again after the Philly Fed data," said George Davis, senior strategist at RBC Capital Markets in Toronto.
The dollar has declined around 1.7 percent against a basket of major currencies this year, driven by expectations that US interest rates will decline while economies overseas grow faster, sending interest rates higher in Europe and elsewhere.
However, investors have pared back their expectations for US rate cuts somewhat after Thursday's economic data. Eurodollar futures reflect roughly a four in five chance that the Fed will cut interest rates by a quarter-percentage point by the end of the year from close to 100 percent a day ago.
The index is expected to decline to 86.5, from April's final reading of 87.1, pushed down by rising gasoline prices and slowing jobs growth, a Reuters poll shows.