The dollar edged up to a fresh six-week high against the euro and held near a six-week peak versus the yen on Friday, as investors calculated the currency would get a further boost from rising U.S. interest rates.
Yet trading was sluggish as many markets were closed for a holiday weekend, which cooled off the dollar's rally, and some participants remained unconvinced that the buying would last.
Analysts said the dollar's roughly 3.5 percent climb against the euro and 2 percent gain versus the yen in the past week have been driven by investors scurrying to cover short dollar positions, and hardly constituted a dollar-buying trend.
"The dollar buying we've been seeing ahead of the holiday has been driven by repositioning, and it's difficult to say whether this is going to continue into next week," said Hideaki Furumaya, forex manager at Trust and Custody Services Bank.
The dollar has ridden a wave of bullish sentiment this week after the Federal Reserve suggested it could raise U.S. interest rates more aggressively if inflation heats up.
Figures on Wednesday showing core U.S. consumer prices rising at the fastest year-on-year pace since 2002 added to the possibility of even bigger rate rises.
The Fed has raised rates by a quarter-percentage point at seven straight policy meetings, but the chance that it might switch to half-percentage-point increases could help lure more foreign investors to short-term dollar deposits.
The dollar has so far this week enjoyed its strongest run against a basket of currencies since the first week of the year, when it unexpectedly jumped higher.
As of 12:43 a.m. EST, the euro fetched $1.2943 after earlier dipping to around $1.2930, its lowest level since Feb. 14. The single European currency has fallen 5.4 percent from a record high near $1.3670 hit in December.
The dollar was at around 106.31 yen little changed from late levels in the United States after having struck a fresh six-week high of 106.58 yen in New York.
FOCUS ON FUNDAMENTALS
The market's attention has turned to U.S. data due out next week, particularly the March payrolls report, which could shed further light on the outlook for U.S. interest rates.
Economists expect the payrolls data, due next Friday, to show that the U.S. economy created 220,000 jobs in March, down from 262,000 in February, which was the biggest gain in four months.
The report will be the highlight of a U.S. data-heavy week that includes the final reading of fourth-quarter gross domestic product and the February reading of the PCE index -- an inflation gauge favored by the Fed.
So long as the market is focused on what U.S. economic figures may indicate about future Fed moves, some in the market said that Japanese data, including the Bank of Japan's closely watched tankan survey at the end of next week, could have limited sway over the market.
Business sentiment in the quarterly poll, also due out next Friday, probably improved marginally in March but likely remained subdued due to slack exports and rising oil prices, economists polled by Reuters said.
The previous poll showed a worsening of sentiment for the first time in seven quarters.
"It probably does matter -- the tankan -- but it's not likely to have a sustained effect (on currencies) so long as the U.S. dollar continues to garner rewards from the inflationary expectations," said Naomi Fink, senior currency strategist at BNP Paribas.
A slip in consumer prices in Japan caused barely a ripple in the currency market.
Data released on Friday showed that the nationwide core consumer price index, a key benchmark for monetary policy, fell 0.4 percent in February from a year earlier. (Additional reporting by Naomi Tajitsu)