A measure of core inflation held steady in September while a regional economic index showed a surprise uptick in October, on the eve of what is widely expected to be the Federal Reserve's twelfth consecutive interest rate increase.
"You have here strong US data yet again. People haven't wanted to believe the Fed rhetoric, but with the strength in the US economy, maybe the Fed just wasn't talking tough," said TJ Marta, senior currency strategist with RBC Capital Markets.
The dollar had hit its highest level against the yen since September 2003, at 116.47 yen according to Reuters data, up 0.6 percent on the day. Steady dollar selling from Asian accounts prevented the breach of a barrier option believed to be at 116.50 yen, a trader with Mellon Bank said.
"The direction of dollar/yen looks like it's going to be up and people aren't going to fight that until we take out some supports," said Grant Wilson, vice president at Mellon.
However, with the US currency perched above 116 yen, Wilson advised against putting on fresh bets on the dollar and instead suggested cashing out existing positions.
The euro dipped against the dollar to an intraday low of $1.1969 before fighting back up to $1.1988, down 0.6 percent from late Friday.
The National Association of Purchasing Management-Chicago said its index of Midwest manufacturing activity rose to 62.9 in October from 60.5 in September. Economists had expected a reading of 58.0.
"It confirms the Fed's optimistic assessment of the US economy and essentially signals that the Fed's measured tightening campaign will persist. So this is dollar-positive," said Alex Beuzelin, senior market analyst with Ruesch International in Washington.
Earlier, a report showed the core PCE price index, a key inflation measure closely watched by the Federal Reserve, rose 2 percent on a year-over-year basis in September, matching August's increase. While the gauge was steady, it was at the upper end of what is considered the Fed's comfort zone with inflation.
Against the Swiss franc, the dollar accelerated gains, rising 0.6 percent to 1.2890 francs. Sterling fell 0.1 percent to $1.7698. The pound earlier gained ground on news Spain's Telefonica SA had agreed to buy British mobile phone firm O2 Plc for 17.7 billion pounds.
At its policy setting meeting on Tuesday, the Fed is expected to raise interest rates to 4 percent and perhaps add a hawkish tone to its accompanying statement, signalling more rate rises are in the offing.
"The last statement was right in the aftermath (of hurricane Katrina) when people weren't sure what the damage was," said RBC's Marta. "What has been confirmed is the damage hasn't been that great, so I would expect a more hawkish statement," he said.
Overall, analysts say this week's central bank meetings are likely to further underpin the dollar.
Comments from European Central Bank officials have turned more hawkish recently, but analysts say a hike in euro zone interest rates is not expected any time soon, certainly at this Thursday's council meeting.
The ECB has hammered home its determination to prevent high energy costs driving up wages and prices in the euro zone.
Markets now see a 60-70 percent chance of a rise in ECB interest rates, which currently stand at 2.0 percent, by December. If a euro zone rate rise does materialise, that could give much-needed support for the euro.