The dollar rose versus the yen for the first time in three sessions after a government report showed foreign investors bought a record amount of U.S. securities in May.
The dollar also garnered support from a report showing core producer prices in June were slightly higher than expected. The report in combination with a reading on industrial production, which also rose in June, eased some concerns the Federal Reserve will have to reduce interest rates in the near term.
The TIC report really caught people's attention simply by showing that appetite for U.S. assets remained fairly strong in May, said David Watt, a foreign exchange strategist at RBC Capital in Toronto. The volume of inflows is enough to get some bears buying back some dollars in particular against the Japanese yen.
In late morning trading in New York, the dollar was up 0.35 percent at 122.27 yen. The euro was little changed, slightly higher at $1.3782, retreating from a record high of $1.3813 hit on July 13, according to Reuters data.
Net overall capital inflows into the U.S. rose to $105.9 billion in May, with corporate bond and equities purchases driving long-term monthly investments to a record high, the Treasury department said.
The dollar started to rise versus the yen after a government report showed core producer prices, which exclude energy and food costs, rose 0.3 percent in June, after a 0.2 percent increase in May.
Core prices increased 0.3 percent, which was more than the market was expecting for the month of June, said Kathy Lien, chief strategist at DailyFX.com in New York. The Fed focuses on core prices and we need to as well. We are looking for the dollar to recover further against the Japanese yen.
In a separate report, industrial production climbed 0.5 percent in June, after a 0.1 percent drop in May.
The euro rose 0.4 percent versus the yen to 168.47 after European Central Bank council member Nicholas Garganas said inflation risks are rising in the euro zone and another interest rate increase is likely.
I would expect that a further withdrawal of monetary accommodation is warranted, Garganas told the news agency Bloomberg.
Investors' focus now may turn to a release on U.S. consumer prices for June on Wednesday and to the twice yearly Congressional testimony on monetary policy by Federal Reserve Chairman Ben Bernanke.
Traders said any sign of concern by Bernanke about problems in the subprime market could prompt more dollar selling.
(Additional reporting by Nick Olivari and Kevin Plumberg)