The dollar hit its highest level in nearly 4 months against the yen and held near 7-week highs versus the euro on Friday as markets awaited US employment and manufacturing data for hints on the US interest rate outlook.
Some investors are speculating the Federal Reserve is likely to hold rates at 5.25 percent in coming months, after a strong report on Chicago business activity on Thursday reinforced such views and gave a boost to the dollar.
Positive dollar sentiment was supported by comments from Federal Reserve Board Governor Randall Kroszner who said US economic growth should rebound in the course of 2007 and that the main threat to the economy was inflation.
Euro zone policymakers also sounded a hawkish note, with European Central Bank Governing Council Member Klaus Liebscher saying the ECB would remain strongly vigilant and Vice President Lucas Papdemos saying such vigilance is of the essence.
US May non-farm payrolls data is due at 1230 GMT, and the Institute for Supply Management's May manufacturing index at 1400 GMT. "The big question mark is the labour market - the Fed is on hold because there are no signs of any significant problems in the labour market. The signal for a Fed change would come from the labour market at this point in the cycle," Standard Chartered currency strategist Marios Maratheftis said.
The dollar rose as far as 122.08 yen, its highest since mid-February according to Reuters data, and was trading at 121.93 by 1130 GMT, up 0.17 percent from the US close. Traders are looking for a break above 122.20 yen, a 4-1/2-year high struck in January.
The dollar dipped briefly against the yen earlier amid concerns about carry trades after Shanghai stocks fell over 3 percent in late Chinese trade on rumours the government planned a stock capital gains tax. But three officials from the finance ministry and tax administration dismissed the rumours as speculation.
The euro was down 0.1 percent at $1.3435, compared with a seven-week low of $1.3406 hit this week, and steadied at 163.81 yen, half a yen below recent record highs. The single currency was little changed on purchasing managers' data showing expansion in the eurozone manufacturing sector slipped unexpectedly to its weakest rate in 15 months.