NEW YORK (Reuters) - The dollar firmed on Friday to post an eighth straight month of gains against the yen as upbeat U.S. economic data reinforced the view that the Federal Reserve could pare back its monetary stimulus sooner than expected.
The euro, meanwhile, fell against the dollar and yen, hurt by euro zone data showing record high unemployment and low inflation.
In contrast, U.S. consumer sentiment rose to its highest in nearly six years in May while business activity in the Midwest picked up this month after contracting in April. The stronger-than-expected data offset an earlier report showing subdued inflation and a drop in consumer spending.
“The dollar is well bid today because of the U.S. data, which corroborates expectations that the Fed may have to taper its quantitative easing program soon,” said Greg Moore, currency strategist at TD Securities in Toronto.
Moore said TD’s house view is that the Fed would begin to reduce its asset purchases around the fourth quarter of this year.
In late trading, the dollar index .DXY, which measures the dollar’s value against a basket of six major currencies, rose 0.3 percent to 83.272, notching gains of about 1.8 percent in May, the best monthly performance since February.
Data from the Commodity Futures Trading Commission released on Friday showed currency speculators increased U.S. dollar bets for a fourth straight week, lifting them to nearly $44 billion this week, the highest since at least June 2008.
The dollar fell 0.3 percent to 100.39 yen, recovering a bit from a session low of 100.23 yen, its weakest since May 9. Traders cited strong support at the psychologically important 100-yen level.
Analysts said the yen could rebound further in the short term as increasing volatility in equity markets prompts traders to buy back the safe-haven Japanese currency. But the trend for yen weakness remains intact amid expectations for aggressive monetary easing by the Bank of Japan.
The dollar, which rose 3.2 percent in May versus the yen, has been up every month since September and has jumped almost 30 percent during that period, the biggest eight-month gain since the end of the gold standard in the early 1970s.
Next week should be critical for the forex market as investors begin to shift their attention to the U.S. nonfarm payrolls report for May. The Fed has said it will continue to buy assets until it sees substantial improvement in the outlook for the U.S. labor market.
“Increasingly, the markets are looking towards next Friday’s nonfarm (payrolls) as potentially being the piece of data that does push the Fed towards tapering,” said Camilla Sutton, chief currency strategist at Scotia Bank in Toronto.
The euro fell 0.4 percent to $1.2996, off Thursday’s three-week high of $1.3061, according to Reuters data. On the month, the euro lost about 1.3 percent, its worst showing since February. Against the yen, the euro was down 0.7 percent at 130.52 yen.
Unemployment in the 17-nation euro zone rose to 12.2 percent in April, marking a record since the data series began in 1995. Consumer price inflation was 1.4 percent in May, far below the European Central Bank’s target of just below 2 percent.
The data raised concerns ECB policymakers may ease monetary policy further, although a Reuters poll showed most economists think the ECB will stay on hold.
Commodity-linked currencies also fell sharply, with the New Zealand dollar dropping to a nine-month low of US$0.7935. It was last down 1.5 percent at US$0.7952. The Australian dollar fell 0.8 percent to US$0.9576.
Central bank policy meetings would also be in focus next week. The Bank of England, the ECB and the Reserve Bank of Australia are all scheduled to convene and most analysts expect them all to keep their policy rates unchanged.
UBS analysts said, however, that if there is any central bank that may just surprise with a rate cut, it would have to be the RBA.
Additional reporting by Wanfeng Zhou; Editing by James Dalgleish