The US dollar is trading near its worst levels for the week in mostly quiet turnover. The yen is displaying independent strength and has now eclipsed the New Zealand dollar as the strongest of the major currencies this week with a 2.1% gain against the dollar. Sterling, which had been lifted to a month high yesterday on the back of the constructive Q2 GDP report, is actually the weakest performer against the greenback this week, gaining slightly less than 0.9%. The yen's strength seems a bit ironic. We learned yesterday that Japanese investors have bought foreign bonds for the third consecutive week and earlier today we learned that core inflation (June) turned positive for the first time since April 2012 and at 0.4%, the fastest pace in five years. The combination of greater capital outflows and higher inflation would have weighed on the yen, not lifted it. The dollar is trading at its lowest level against the yen since July 11 and it has approached its 100-day moving average (~JPY98.45) for the first time in a month. This also corresponds to a retracement objective of the dollar's recovery off the JPY93.80 low set in mid-June. The next retracement target is seen near JPY97.65. The strength of the yen weighed on the Japanese shares, where the Nikkei tumbled 3%, led by financials (-4.2%) and technology (-3.6%), though no sector escaped the carnage. Before today, the Nikkei was nearly flat on the week and the 3.2% decline over the past five sessions is the most among the major markets. On the other hand, Japanese bonds are firm and the 10-year yield has held mostly below 80 bp this week, which was the previous floor. Most of the rise in Japanese prices is coming from fresh food and energy and appears to be a reflection of the weak yen pushing up import prices rather than a break domestic deflationary forces. Excluding fresh food and energy, Japan's consumer prices were -0.2% year-over-year in June, while the same measure for Tokyo in July was -0.4% (unchanged from June).