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NEW YORK (Reuters) - The dollar fell from a four-year peak against the yen on Friday after dismal data on U.S. retail sales in March reinforced expectations the Federal Reserve will continue buying bonds to support the economic recovery.
The yen's bounce, however, should prove to be temporary given the Bank of Japan's aggressive monetary easing to fight decades-long deflation. Most market experts contend it's only a matter of time before the dollar rises above the 100-yen mark, a key psychological and technical level.
The dollar succumbed to selling pressure after data showed U.S. retail sales fell 0.4 percent in March, contracting for the second time in three months in a sign the American economy may have stumbled at the end of the first quarter.
"It is the latest in a growing list of economic numbers that will likely keep the dollar pressured and the Fed in no hurry to normalize policy," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.
Separate data on Friday showed U.S. consumer sentiment tumbled in April.
The Fed's bond-buying program is tantamount to printing money and dilutes the value of the dollar. Minutes from recent Fed meetings suggested some policymakers expected to taper the pace of asset purchases sometime this year.
Nevertheless, those meetings occurred before the release of the jobs data for March, which showed tepid gains in payrolls. The Fed has said it will continue buying bonds until the labor market shows substantial improvement.
The dollar last traded at 98.78 yen, down 0.9 percent and far below the session high of 99.80 yen, according to Reuters data. The dollar reached a high of 99.94 on Thursday, the strongest since April 2009.
The dollar has gained about 6 percent against the yen since the BoJ last week pledged to inject about $1.4 trillion into the Japanese economy in less than two years. But the rally has slowed near the psychologically important 100 level, with traders citing hefty option barriers and dollar selling pressure from Japanese exporters.
Currency speculators decreased their bets in favor of the U.S. dollar in the latest week, according to data from the Commodity Futures Trading Commission released on Friday.
The BoJ's steps have prompted many analysts to revise up their forecasts for the dollar's strength against the yen. Societe Generale analysts now target an eventual rise to 110, up from 103 previously, while Bank of Tokyo Mitsubishi UFJ forecasts dollar/yen at 109 in the next 12 months.
The euro was at 129.24 yen, down 1 percent and sharply below 131.11 yen set on Thursday, which marked its highest in more than three years.
On Friday BoJ Governor Haruhiko Kuroda said he had taken all necessary steps to meet the central bank's 2 percent inflation target in two years and will try to minimize volatility in the Japanese government bond (JGB) market caused by the massive bond buying program.
Fund managers and analysts say that once the volatility in the bond market settles, Japanese investors are likely to reallocate money overseas in search of higher yields.
"With the BoJ now a major buyer of JGBs, expectations are that Japanese investors in JGB's -- mainly banks, insurance companies and pension funds -- will start to allocate part of their money to foreign assets," said Jaco Rouw, fund manager at ING Investment Management.
"This might partly be on an unhedged basis if the BoJ successfully creates expectations of a weaker yen. As almost all yen weakness so far has been driven by the international financial community, this Japanese flow should be the next leg of further yen depreciation."
The data shows no such flow yet, but analysts expect that may change quickly. <JP/CAP>
Against the dollar, the euro was at $1.3078, down 0.2 percent, weighed by concerns about Cyprus. Reported option expiries around $1.3000 could likely keep the currency pinned around that level.
Cyprus said its financing needs under its international bailout have risen to around 23 billion euros, from 17.5 billion euros originally.
In other asset markets, gold fell below $1,500 per ounce on Friday, a drop of more than 20 percent from its record 2011 highs, putting it in bear market territory for the first time since last May.
Looking ahead, next week's U.S. data runs the gamut, with gauges on housing to inflation likely to garner the most attention. There have long been fears that Federal Reserve bond buying would spur inflation, but readings so far have been tame.
Additional reporting by Wanfeng Zhou; Editing by Leslie Adler