The dollar climbed on Thursday due to Japanese investor demand, even as traders and investors were caught off guard by the currency's surprising strength this week after an array of poor economic news.
Dealers in Tokyo said demand for dollars by Japanese investors helped lift the currency broadly during an otherwise quiet session. The nearly 0.6 percent drop in the benchmark Nikkei stock average also weighed on the yen.
Japanese investors bought 1.03 trillion yen ($9.60 billion) of foreign bonds and stocks in the week ending April 9, according to Finance Ministry data on Thursday, as they put cash to work in the new fiscal year that started this month.
Traders have been baffled by the dollar's sharp and surprising rebounds this week after U.S. reports showing the trade deficit hitting a record $61.0 billion in February and poor retail sales in March.
"The reaction to the dollar data has been all over the place," said a dealer at a U.S. investment bank. "It's really quite confusing."
Rumours that billionaire investor Warren Buffett was buying back the dollar after having made massive bets against the U.S. currency also prompted traders to tread cautiously. Buffett wagered $21.4 billion against the dollar last year.
The market has also been torn between the dollar-positive factor of rising U.S. interest rates and the persistent negative factor of the giant current account and budget gaps, leaving currencies whipsawed by short-term speculators.
"It just shows the split in the way people think," said Luke Waddington, head of forex dealing at Royal Bank of Scotland in Tokyo.
At 0604 GMT, the euro was at $1.2875 , down about 0.3 percent on the session and holding above two-month lows around $1.2800.
The dollar rose to 107.85 yen from late New York levels around 107.35. The U.S. currency also gained against sterling, the Swiss franc and the Australian dollar.