The U.S. dollar gained Wednesday after a pair of reports showed retail sales in the U.S. fell more than expected and import prices declined.
The dollar slipped to 89.04 yen from 89.35 yen late North American trading on Tuesday.
Concerns about slowing demand from U.S. consumers may also restore some preference for the relative safety of the dollar versus many currencies besides the yen.
"Dollar and yen extend gains against the majors, with the yen getting the best of the greenback as risk aversion intensifies and leading stock indices double their losses," said Ashraf Laidi, chief market strategist at CMC Markets
Import prices fell 4.2% last month, mostly due to oil prices, the Labor Department said. See import price story.
"We're importing deflation, and are the first country to do so," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. Expectations that deflation will eventually hit other countries are hurting their currencies more.
The dollar index , which measures the U.S. currency against a basket of six major counterparts, rose to 84.495, from 84.212.
The euro gained overnight, caused U.S. trader to reestablish bets in favor of the dollar ahead of the European Central Bank meeting on Thursday, Chandler said.
The euro declined to $1.3140 versus the dollar from $1.3187.
Separately, the government stated that retail sales dropped 2.7% in December, far more than the 1.7% decline expected by analysts polled by MarketWatch.
Excluding autos, sales fell 3.1%, compared to an anticipated 1.6% decline. See retail sales story.
A sharp contraction in the U.S. trade deficit on Tuesday helped propel the dollar to new highs. Read about the trade figures.
While the greenback appears to be in a "consolidation phase" as traders book profits on recent gains, the reaction to the trade figures indicates the greenback rally "may have legs," said James Hughes, a strategist at CMC Markets.
The shrinking of the trade gap stemmed in part from a sharp drop in U.S. imports, underscoring shrinking demand from beleaguered U.S. consumers.
That reinforces ideas "that we need to see an improvement in economic conditions in the U.S. before we begin to observe stability in the global economy," wrote economists at BNP Paribas.
The dollar's appeal may also be gaining favor as the credit rating of other nations' debt face downgrades.
Greece saw its key sovereign credit rating cut by Standard & Poor's on Wednesday, downgrading the debt to A- from A. See full story.
S&P also put Portugal on negative credit watch Tuesday due to high government debt levels, and put AAA-rated Spain on notice Monday.
ECB on deck
Surveys and credit markets underline expectations the ECB's rate-setting Governing Council will cut its key rate by half a percentage point to 2%.
But economists note some uncertainty surrounds the outcome of the meeting. Some ECB officials had previously signaled a desire to slow the pace of rate cuts after dropping the bank's key lending rate from 4.25% since October. See ECB preview.
The British pound advanced in earlier trading after the U.K. government unveiled a plan to provide more than 20 billion pounds ($29.1 billion) in guarantees designed to ensure credit continues to flow to small- and medium-sized U.K. businesses.
The British pound recently bought $1.4555 compared to $1.4447 late Tuesday. See U.K. story.
"This remains an important issue allowing businesses to continue trading [while] banks attempt to go through a de-leveraging process - hence if properly implemented this is a positive for the economy," wrote strategists at HBOS.
