On Friday, the dollar fluctuated around seven-month lows, as a number of data reinforced investors' concerns that a slowdown in economic growth may be inevitable, and a bout of profit taking forced the yen to retreat.
The dollar rose 0.2% against a basket of other major currencies to 102.17, holding just above Wednesday's seven-month lows. The index has fallen 1.3% this year after falling 7.7% in the final three months of 2022 as investors began adding a higher probability that the Federal Reserve would slow the pace of interest rate hikes.
The Japanese yen bore the brunt of the dollar's strength. The dollar rose by as much as 129.26. The yen, which investors have long preferred as a safe haven and funding currency, has endured several volatile weeks.
Speculators are betting that the Bank of Japan, the last major central bank to still use loose monetary policy, is approaching a move to a tighter stance. This led to a rally in the yen, which pushed the dollar/yen currency pair down 14% over the past three months.
Data on Friday showed japan's main consumer prices rose 4.0% in December from a year earlier, double the central bank's 2% target.
"Japan now has an inflation problem that it hasn't had in nearly 40 years," said CMC Markets chief strategist Michael Hewson.
"For me, the die is cast — the dollar/yen is going to go down and it's a matter of how fast," he said.
The Bank of Japan on Wednesday maintained its ultra-loose monetary policy, although there were expectations among investors that the central bank could signal changes.
"We now expect the Bank of Japan to get out of control of the yield curve and negative interest rate policy by the end of June, assuming a significant acceleration in wage growth in Japan," said Carol Kong, currency strategist at Commonwealth Bank of Australia.
A flurry of U.S. data on Thursday showed the world's largest economy slowing after the Fed's multiple rate hikes. Money markets show that traders are preparing to stop raising rates by the middle of this year.
However, the number of Americans who applied for new jobless claims unexpectedly declined last week, pointing to another month of solid job growth and ongoing labor market tensions.
"If you look at how the market has evolved this year, the start has been tumultuous and at some point there should always have been a slight pullback, and we're certainly seeing that now," said CMC's Hewson.
With a lot of top-tier data, investors are waiting for the Fed's first meeting in early February.
The central bank raised interest rates by 50 basis points (bps) in December after four consecutive increases of 75 bps, and the market is looking forward to another cut.
ING economists said the focus on U.S. growth means the dollar remains vulnerable to data release as markets continue to lower Fed rate expectations.
"The fact that the ongoing "dovish" revaluation is a consequence not only of a slowdown in inflation, but also of a deterioration in the economic outlook in the United States, exacerbates the negative consequences for the dollar," ING economists said.
Meanwhile, the euro was unchanged at $1.0834, while sterling fell 0.4% to $1.2342 after UK data showed an unexpected drop in retail sales in December as British buyers bought less but spent more.