The dollar crept up against the yen on Friday on investor optimism that financial markets may be regaining stability, offsetting worries somewhat about the US economy before a key payrolls report due later in the day.
The Australian dollar fell against the US currency and the yen after retail sales data showed an unexpected drop and comments by Australia's central bank governor reinforced a market belief that interest rates may have peaked.
The dollar had fallen against the euro and the yen on Thursday after data showed first-time applications for US jobless benefits rose last week to a two-and-a-half-year high, renewing worries that the US economy has stalled.
But traders said some market players were betting that Friday's jobs data would only support expectations for a Federal Reserve rate cut later this month, though there was a risk that a worse-than-expected result could renew expectations for a big Fed rate cut and knock the dollar.
"The market will closely watch whether the US jobs data will pour cold water on optimism or not," said Hideaki Inoue, chief manager of forex trading at Mitsubishi UFJ Trust Banking.
The US currency has rebounded this week, recovering from a record low against the euro and a 13-year trough versus the yen on growing optimism that the worst of the credit crisis was over despite gloomy remarks on the economy by Fed Chairman Ben Bernanke.
Traders said the strength of the dollar's gains will be tested by the employment report due at 1230 GMT.
Economists forecast the US economy likely cut 60,000 jobs in March for its third straight month of losses, with the unemployment rate seen rising to 5.0 per cent, from 4.8 per cent in February.
"The risk after the data is the dollar will fall against the yen, which not many people are looking at right now," said a senior trader at a Japanese bank.
The dollar edged up 0.3 per cent from late New York trade to ¥102.60 as hedge funds bought the currency, while gains were capped by sell orders placed above ¥103 by Japanese exporters seeking to repatriate overseas earnings, traders said.
It climbed to a three-week high of ¥102.95 on Thursday on electronic trading platform EBS.
The Aussie dollar fell 0.4 per cent to $0.9120 after February retail sales dipped 0.1 per cent from the previous month. The market had forecast a gain of 0.3 per cent.
Reserve Bank of Australia Governor Glenn Stevens said on Friday that growth in domestic demand was moderating despite uncomfortably high inflation, suggesting that interest rates had risen enough for now.
Earlier this week, the RBA left the benchmark cash rate at 7.25 per cent, saying there were tentative signs past rate increases were working to curb inflationary pressure.
The Aussie was down 0.1 per cent at ¥93.52.
The euro was little changed at $1.5660 after having fallen to around $1.5510 on mounting signs of stress in Europe's banking and retail sectors.
Late on Thursday, San Francisco Fed President Janet Yellen echoed comments on the economy made by Bernanke earlier this week, saying the US economy has "all but stalled and could contract" in the first half of 2008.
Interest rate futures suggest traders see an 80 percent chance the Fed will lower its fed funds target by 25 basis points at its policy meeting later this month, with a 20 per cent chance of a 50 basis point cut.
The Fed has chopped its interest rates since September by a total 3 percentage points to 2.25 per cent, to deal with the credit crisis and shield the economy from an ailing housing sector. (Reuters)
Dollar edges up versus yen before US jobs data