The 10-year Treasury yield, which the dollar-yen pair tends to track, slipped to 3.4252% in Tokyo trading, extending an 8 basis point decline from overnight after headline CPI printed below 5% for the first time in two years.
The US currency fell 0.26% to trade at 134.025 in the Asian morning, and earlier dipped as low as 133.895.
The dollar index – which measures the greenback against a basket of six major peers, including the yen – edged 0.05% lower to 101.36.
“Yesterday’s CPI was a bit of a relief, and we do expect that the Fed is now finished hiking,” said Shinichiro Kadota, senior FX strategist at Barclays in Tokyo.
“That’ll weigh on dollar-yen,” with the pair potentially weakening to as low as 130 in the near term, Kadota said.
Money market traders currently lay only 5% odds on a quarter-point hike in June, and a 95% probability of a pause. Three quarter-point cuts are priced by the end of this year.
Bank of Japan policymakers, meanwhile, saw the country making progress towards sustainably hitting their inflation target, according to minutes from their April meeting.
But they also agreed on the need to maintain an ultra-easy stimulus setting amid uncertainty about the sustainability of wage growth as well as the global economic outlook.
“They’re still trying to balance the overall tone,” said Kadota.
The euro inched 0.05% higher to US$1.09885, moving back to the middle of its trading range over the past month.
Sterling nosed up 0.04% to US$1.2631, edging back toward Wednesday’s one-year high of US$1.2679. The Bank of England releases its policy decision later on Thursday and is poised for a 12th straight rate hike.
Elsewhere, the Aussie dollar rose 0.08% to US$0.6784, pushing back toward Wednesday’s 2-1/2-month high of US$0.6818.
New Zealand’s kiwi dollar added 0.09% to US$0.63735, after touching a nearly three-month high of US$0.6384.
Earlier gains cooled after data from China – a key trading partner – showed consumer prices rising at a slower pace, giving further evidence of tepid domestic demand.
Leading cryptocurrency bitcoin was little changed at around US$27,562, after dipping as low as US$26,842 overnight for the first time since March.