The dollar hit a two-month high versus the yen on Wednesday after strong housing data offered signs that the US economy may be recovering from a weak first quarter.

The dollar rose as high as 120.98 yen, its strongest level since March 20, before paring some of the gains to trade at 120.86 yen, up 0.1 per cent on the day.

Data on Tuesday had showed US housing starts jumped to their highest in nearly 7-1/2 years in April and building permits soared.

After retreating broadly in recent weeks on doubts about the pace of the US recovery, the dollar has regained some ground this week, especially with the euro and sterling encountering renewed selling.

The dollar was also looking better positioned against the yen on technical charts, having risen above trendline resistance near 120.30 yen on Tuesday.

“There are (dollar) offers all the way up ... but we see a grind higher now to 122/123,’’ said Jeffrey Halley, a currency trader for Saxo Capital Markets in Singapore.

Japan’s GDP growth

The yen showed limited reaction to data showing Japan’s economy expanded at its fastest pace in a year in January-March, with an annualised rate of 2.4 per cent. Growth was inflated by inventory as business investment failed to gather momentum.

There were some moves recently towards renewed yen-selling, even as the dollar was trapped in a range against the yen, said Shinji Kureda, head of currency trading for Sumitomo Mitsui Banking Corporation in Tokyo.

When the euro bounced recently due to the squaring of short euro positions, which had been a popular bet, some market participants started to see the attraction of selling the yen instead, he said.

“Amid some moves to shift toward yen-selling, we are finally starting to see a break toward the topside of the (dollar/yen) range,’’ Kureda added.

Against a basket of six major currencies, the dollar stood at 95.343. The index has risen about 2.4 per cent this week after falling for five straight weeks.

ECB bond-buying

The euro eased 0.1 per cent to $1.1141, staying on the defensive after tumbling on Tuesday as the European Central Bank indicated it would accelerate the pace of money printing to buy government bonds over the next two months.

ECB executive board member Benoit Coeure said the speed of the recent spike in bond yields was worrisome and that the ECB could “moderately’’ increase its buying in May and June so that it did not fall below its monthly buying target.

Other central bankers later chimed in, with Christian Noyer saying the “Eurosystem is ready to go further if necessary.’’

The euro had slid 1.6 per cent on Tuesday, with traders saying a break below the 100-day moving average around $1.1170 had added to the downward momentum.

“We saw an onslaught of selling in EUR/USD in this move, led by leveraged and real money,’’ analysts at CitiFX wrote in a note to clients.

Sterling plunges

Sterling nursed its losses from Tuesday, when sellers took aim at the currency after Britain’s annual consumer price inflation fell below zero for the first time in more than half a century.

On Tuesday, it had skidded to its lowest in over a week against the greenback, reaching a trough of $1.5447. On Wednesday, it traded at $1.5514.

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