The dollar held firm near a two-month high against the yen on Tuesday as investors looked ahead to the greenback's direction in the new year after a rally this month. Activity stayed slow with many investors still away although the Australia and UK markets were reopening after holidays. Flows from Japanese companies were limited as many have begun year-end holidays.
The dollar has risen broadly in recent weeks on optimism the US economy may be poised for better growth in 2010. Monday's strong US retail sales figures may bode well for US consumer confidence for December due later in the day and add to the buoyant mood in the market, analysts said.
Other data to watch on Tuesday that could move the dollar includes Standard & Poor's/Case-Shiller home price index for October. Traders said upward pressure on long-term Treasury yields is providing support to the dollar against the yen after US government bonds traded lower the previous day and pushed the benchmark 10-year note yield to its highest in nearly five months.
"Given the fact that upward pressure remains on Treasury yields, dollar/yen still has the potential to reach as high as mid-92 within the year," said Toshihiko Sakai, a manager for forex trading at Mitsubishi UFJ Trust Bank. The spread between the benchmark 10-year US Treasury note and Japanese government bond yields was close to the widest level in two years marked late last week. The widening yield spread was also seen as a factor that had been giving a boost to the dollar versus the yen.
Analysts at Calyon said in a client note that the Federal Reserve's latest plan to create a new tool to withdraw money from the banking system suggested that the exit strategy from quantitative easing is being prepared more actively. The Fed meanwhile stressed the plan did not represent an immediate move toward a less accommodative monetary policy.
The dollar rose 0.1 percent from late New York trade to 91.74 yen, within reach of a two-month high of 91.88 set last week. The euro edged down to $1.4359 after having rebounded above $1.44 in holiday-thinned trade late last week from a 3-1/2-month low of $1.4218 hit a week ago.
The dollar index, a gauge for the greenback's performance against other six major currencies, rose 0.1 percent to 77.740 in sight of a 3-1/2-month high of 78.449 hit last week. Some traders said the dollar may struggle to rise further after speculators have finished covering short dollar positions.
Data on Monday showed speculators were long in the US currency for the first time since May, ending 32 straight weeks of short dollar positions. Other data released on Monday showed US retailers performed better during the holiday shopping season this year than in historically dismal 2008, in line with lowered expectations.