(Updates prices at 0505 GMT)
The yen was poised for its strongest week in nearly three months on Friday as traders unwound long-held bets against the frail currency ahead of crucial U.S. inflation data that could cement rate cut expectations.
The yen JPY=EBS has dominated the currency markets this month, surging to a near three-month high of 151.945 per dollar on Thursday after starting the month languishing at a 38-year low of 161.96 per dollar.
On Friday, the yen was last at 153.66, set for a 2.5% rise for the week, its biggest weekly gain since late April-early May, as a global stocks sell-off also drove investors towards safe assets, including the yen.
The large move follows suspected interventions by Tokyo in early July that wrong-footed traders and led to an unwinding of profitable carry trades, in which traders borrow the yen at low rates to invest in dollar-priced assets for higher returns.
"I think the speed of the yen rally means we are probably due some consolidation pretty soon," said James Athey, fixed income portfolio manager at Marlborough Investment Management.
"But ultimately with the shine coming off risk assets and data and Fedspeak suggesting cuts are coming I still feel the yen has further to appreciate."
Investor attention on Friday will focus on U.S. personal consumption expenditure data, the Federal Reserve's favoured measure of inflation. The PCE data is expected to come in at 0.1% on a monthly basis.
The Fed meets next week and is expected to stand pat on rates this time but markets are fully pricing in a rate cut in September. Traders also anticipate 66 basis points of easing this year. FEDWATCH
The Bank of Japan on the other hand may raise rates next week, with markets pricing in a 64% chance of a 10 bps hike.
0#BOJWATCH Data on Friday showed core inflation in Japan's capital accelerated for a third straight month in July, keeping alive expectations of a near-term interest rate hike.
The surge in the yen though may allow the central bank to take its time, analysts say.
"The pressure on the Bank of Japan to tighten policy has reduced," said Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management.
"But they're still expected to announce details of their balance sheet reduction, which is some form of quantitative tightening of course."
The dollar index =USD , which measures the U.S. unit versus six rivals, was little changed at 104.29. The euro EUR=EBS was a tad stronger at $1.08575.
The dollar found its footing after data on Thursday showed the U.S. economy expanded faster than expected and inflation slowed in the second quarter.
The latest data underscored that the world's largest economy remained resilient even as inflation eased, spurring investor expectations that the U.S. central bank could engineer a soft landing for the economy.
"The U.S. economy has not run out of steam just yet, despite having restrictive interest rates for quite some time," said Kristina Clifton, a senior economist at Commonwealth Bank of Australia.
Clifton anticipates that the first rate cut will come in November. "We expect that the FOMC will require a long string of lower inflation readings before easing interest rates."
Sterling GBP=D3 was 0.12% higher at $1.2865 but well below the one-year high of $1.3044 hit last week, with traders pricing a 50% chance of the Bank of England cutting rates next week. Markets are anticipating 51 bps of cuts this year.
0#BOEWATCH The souring risk sentiment this week has weighed heavily on the Australian dollar AUD=D3 and the New Zealand dollar NZD=D3 , with both currencies - seen as risk proxies - down nearly 2% for the week.
On Friday, both were slightly higher, with the Aussie up 0.23% at $0.6552, lifting away from the near three-month low it touched on Thursday. The kiwi was last up 0.13% at $0.5891.
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