The dollar rose to a 10-week high against the yen on Thursday as markets grew confident that the Federal Reserve would take a patient approach to further monetary easing, even with a key inflation report due later in the day.
The dollar index, which measures currencies against six key rivals including the yen, was near a nearly two-month peak overnight as traders further reduced bets on a U.S. interest rate cut this year after unexpectedly strong wage data last week.
The euro is trading near its lowest level against the dollar since August 13.
Economists polled by Reuters said the September consumer price index (CPI) will show that U.S. core inflation will remain at 3.2% year-on-year.
Kyle Rodda, senior financial markets analyst at Capital.com, said the "American exceptionalism trade" has been reignited after a recent slew of strong jobs data.
Minutes from the Federal Reserve's most recent meeting were released on Wednesday, confirming the central bank's focus on maintaining the health of the labor market.
Rodda noted that the dollar is regaining its hegemony…primarily due to the continued outperformance of the U.S. economy.
Meanwhile, "CPI could force the Fed to question its confidence in the path of inflation." San Francisco Fed President Mary Daly said late Wednesday that she is now worried not about re-inflation but about damage to the labor market.
CME Group's FedWatch Tool shows traders are predicting an 85% chance of a 25 basis point cut in interest rates at the next policy decision on Nov. 7, with a 15% chance of no change. Just a week ago, there was a 65% chance of a quarter-point cut and a 35% chance of a half-point cut.
The dollar index was little changed at 102.90 so far this week, just shy of Wednesday's high of 102.93, last seen on Aug. 16.
The dollar rose to 149.543 yen during the session after earlier hitting 149.54 yen for the first time since Aug. 2. The euro was flat at $1.0940 after falling to $1.0936 in the previous session.
Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia, predicted that pricing in rate cuts at the two remaining Fed meetings this year is limited without much guidance from senior Federal Open Market Committee (FOMC) officials.
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