The dollar lost ground against the yen this morning, but it held close to four-month highs against a basket of currencies thanks to strong U.S. data, and rising expectations that the Bank of Japan will take additional easing steps.

Commerce Department data showed that U.S. housing starts surged 4.8% to a seasonally adjusted annual pace of 1.19 million units, underpinning a theme of strength in the U.S. economy.

The dollar slipped down 0.2% against the yen to 105.96 yen, after hitting 106.53 yen yesterday, its highest level since June 24, when markets were shaken in the wake of Britain's surprise vote to exit the European Union.

Investors have been relaxing their safe-haven bids in the yen as the initial shocks from the Brexit vote dissolved, and expectations rose of additional easing from the Bank of Japan at its July 28-29 meeting.
A majority of economists polled by Reuters expect further BOJ easing, which will likely consist of a combination of measures.

"If the BOJ doesn't take any action, the dollar/yen can fall back to 100 again," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.

"Now the focus has also shifted to the possibility of a U.S. interest hike," he said, which will likely underpin the dollar even in the event the BOJ decides not to ease this month.

Japanese policymakers won't go as far as funding government spending through direct debt monetisation, but might pursue a mix of aggressive fiscal and monetary expansion to fight deflation, according to sources familiar with the matter.

The dollar index, which tracks the U.S. unit against a basket of six major rivals, was steady at 97.068, after earlier rising as high as 97.185 earlier in the session, its highest level since March 10.

"The broad sideways movement in the dollar index since March 2105 was primarily a consolidative phase, from which it will launch another leg higher," Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said in a note.

"Our underlying constructive outlook for the U.S. dollar remains intact," he said. "It is broadly based on the divergence between the U.S. and most other major economies."

Fed funds futures rates show investors see almost a 50/50 chance that the U.S. central bank raises rates by its December meeting, according to CME Group's FedWatch tool, compared with less than 20% a few weeks ago.

The euro was last down 0.1% at $1.1013, after falling to a three-week low of $1.0995 earlier in the day.

The European Central Bank will hold a regular policy meeting tomorrow, its last one before an eight-week summer break. It is not expected to take any additional easing steps.

"For the ECB, if anything, we might see some changes to technical parameters, but nothing much is expected," said Mitul Kotecha, head of FX strategy, Asia-Pacific for Barclays in Singapore.

Some bond traders believe the ECB might address the scarcity of bonds it can buy under its 1.7 trillion euro stimulus programme.

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