The dollar hit a 4-1/2-year peak against the yen on Thursday, extending gains after strong U.S. retail sales data the previous day reinforced expectations the Federal Reserve would not cut interest rates this year.

That view could be further supported by any upside surprises in U.S. producer prices at 1230 GMT or Friday's consumer prices.

The pricing out of Fed rate cuts has sent U.S. Treasury yields to five-year highs this week, further supporting the dollar.

The dollar will remain supported as long as yields remain firm. The robust retail sales also supported the dollar. If the CPI is pretty strong the market may even think about rate hikes in the U.S., said Antje Praefcke, currency strategist at Commerzbank Corporates & Markets.

By 1114 GMT, the dollar was up a quarter percent to 122.94 yen, having earlier hit 123.03, according to Reuters data. Such levels have not been seen since December 2002, when it had risen as high as 125.70 yen.

Benchmark Treasury yields were steady on Thursday, hovering near five-year peaks hit the previous day.

The dollar held steady at $1.3307 per euro having hit an 11-week high on Wednesday.

The yen fell versus the euro to 163.58 yen, as investors re-entered carry trade investments where cheap borrowing in yen funds purchases of higher yielding units.


The Bank of Japan is widely seen keeping rates at 0.5 percent on Friday, but with expectations running high for a hike in August, investors will closely watch the post-meeting news conference by BOJ Governor Toshihiko Fukui.

The Swiss franc, another low yielder, failed to get a boost from a widely expected interest rate hike or from upward revisions to Swiss National Bank's growth and inflation views.

The SNB may see the domestic economy is in excellent shape but so is every other economy. So there is no room for (franc) out-performance, said Adrian Hughes, currency strategist at Societe Generale.

Rises in stock markets on Thursday boosted risk appetite, further encouraging carry trades.

From the United States, May PPI data are due, while Fed Board Governor Randall Kroszner is due to speak in Washington at the same time.

Core producer prices are seen rising 0.2 percent on the month after a flat reading in April. But the big figures of the week are U.S. consumer price data on Friday.

Teis Knuthsen, head of FX research at Danske Markets said the dollar was also supported after the passing of event risk from Wednesday's U.S. Treasury currency report and the unveiling of a long-awaited bill aimed at forcing China to more quickly raise the value of the yuan.

As expected, the Treasury did not label China a currency manipulator, while the bill set out a fairly lengthy time frame for the implementation of measures against China.

The risk of protectionism that has been weighing on the dollar has been lifted, Knuthsen said.

U.S. Treasury Secretary Henry Paulson is due to speak at 1200 GMT, though the subject is national security and not China.