The dollar edged up against the yen on Friday in light bargain-hunting following two sessions of losses, with some markets slowly getting into gear after the Christmas holiday.

Market participants expected it would still take a bit of time for business to resume in full swing, with key markets in the region such Australia, Hong Kong and Singapore closed on Friday. The UK market will remain closed on Friday although New York will be open.

After a dip to 120.005 yen the dollar was up 0.1 per cent at 120.170 yen, crawling back towards the week’s high of 120.800 hit on Tuesday.

A break above that peak would put the greenback in sight of a 7-1/2 year high of 121.860 scaled earlier in the month.

“That the recent drop by the dollar was contained shows that risk sentiment continues to improve. There is no change to our view that the yen will continue to weaken as the recovery in US economic fundamentals, which is at the root of risk appetite, continues to gather pace,’’ said Junichi Ishikawa, a market analyst at IG Securities in Tokyo.

Dollar vs euro

The dollar also took back some ground against the euro after two days on the retreat.

The euro inched down 0.1 per cent to $1.2210, edging back towards a 28-month trough of $1.2165 reached on Tuesday in light of robust US GDP data that further boosted prospects for the world's largest economy.

Recently upbeat US economic data has provided evidence that the economy is steadily recovering, and heightened expectations that the US Federal Reserve is on track to eventually hike the interest rates in 2015.

Japan, Europe monetary policy

That outlook is in sharp contrast to Japan and Europe, where monetary policy is expected to remain loose to stimulate growth and ward off deflation.

Data released on Friday highlighted some of the struggle the Bank of Japan faces. The year-on-year rise in Japan’s core consumer prices slowed to 2.7 per cent in November from 2.9 per cent in October amid the recent decline in crude oil prices.

Widening differentials between US and record-low Japanese yields should favour the dollar as more market participants return from holidays.

The two-year Japanese government bond yield struck a record-low minus 0.04 per cent last week, taking the spread versus the two-year US Treasury Bill yield to its widest this week in more than four years.

The Australian and New Zealand dollars were little changed after taking a knock earlier in the week from strong US GDP.

In addition to increasingly positive prospects for the US economy, the diminishing premium offered by Australian government bonds over US counterparts has influenced the Australian dollar’s 9-per cent fall this year.

The Aussie was up 0.1 per cent at $0.8123, still within the reach of a 4-1/2 year low of $0.8087 plumbed on Tuesday.

The kiwi gained 0.1 per cent to $0.7738 after dropping to the week’s trough of $0.7694 on Tuesday.

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