NEW YORK Investors bought U.S. dollars and sold yen on Tuesday after stronger-than-expected U.S. retail sales data tempered expectations the Federal Reserve would resort to printing more money to stimulate the economy.
The euro rallied against the yen as well, but held nearly unchanged on the greenback as marginally better-than-expected German and French economic output data was not enough to stop the broader euro zone economy from contracting in the second quarter.
U.S. data showed retail sales rose for the first time in four months in July, a sign that consumers could drive faster economic growth in the third quarter.
The dollar hit a global session peak of 78.93 yen, its highest since July 18. It last traded at 78.75, up 0.57 percent on the day, according to Reuters data.
The euro last traded at 97.07 yen, up 0.5 percent on the day.
"The reports suggest that the U.S. economy continues to grow, although at a slow pace. The numbers moreover reduce the possibility of Fed action at the next meeting," said Vassili Serebriakov, senior currency strategist at Wells Fargo in New York.
"As a result, we're seeing dollar/yen move higher because this is the pair most sensitive to interest rate expectations," he said.
A separate report showed U.S. producer prices climbing in July at the fastest pace in five months.
Reduced expectations that the Fed could soon launch a third round of bond-buying, or quantitative easing, to help the economy boosted the dollar. If the Fed does opt for QE3 it would be negative for the dollar, as it is tantamount to printing money and dilutes the currency's value.
The Fed's next scheduled monetary policy meeting is on September 12-13.
The global risk environment suggests a higher possibility of yen weakness in the near future, according to Jens Nordvig, global head of currency strategy at Nomura Securities in New York.
"Within FX space, the lesson from Q1 was that yen crosses offered an attractive expression of a risk compression view as long as the global environment was risk supportive," his team said in a report.
Nomura said the yen is still one of the safest currencies and should be sold against major currencies during a risk-on environment, recommending buying yen crosses in the form of Mexican peso/yen and British pound/yen longs.
"We are now looking for an opportune time to add another cross yen buying opportunity," the Nomura team said.
TALE OF TWO ECONOMIES
While the U.S. economy is showing signs of improvement, much of the euro zone remains mired in a recession.
Data showed the euro zone as a whole contracted 0.2 percent in the second quarter, suggesting peripheral countries are faring worse than their stronger core counterparts. German analyst and investor sentiment also dropped more than forecast in August.
The euro, however, continues to be propped up by expectations the European Central Bank will step in next month to lower Spain and Italy's high borrowing costs after ECB President Mario Draghi's recent pledge to do all it takes to preserve the currency.
In the overnight session the euro edged higher after a spokeswoman for Germany's constitutional court said no delay was anticipated to an expected verdict on September 12 on the euro zone's rescue funds and the EU's fiscal pact. The verdict is likely to clear some of the uncertainty hanging over the euro.
The euro last traded at $1.2323, down 0.06 percent, above an earlier low of $1.2315 and below a high of $1.2385, according to Reuters data.