The U.S. dollar continues to climb higher against the Japanese yen as it nears the Dec. 22 high of 91.86.

The period from April to late November saw a long, steady slide lower, culminating in the gaps lower on November 24-25 to a low of 85.00. Since then, however, the USD has rallied an impressive 600 pips.

The rebound could be seen as a retracement phase. The 38.2% retacement has already been cleared, with 50% at 93.11 and 61.8% at 95.09.

A rise to the 50% retacement converges with downtrend resistance and a minor high from early September. If 93.23 is cleared, it opens the way for a rally to 95.

In the short-term, the pair presents considerable resistance as well. If the first hurdle at 91.86 is cleared, then 92.32 show offer some stiff resistance.

We see here the significance of the 92.32 high as it was a medium-term top and led to the final leg of the decline.

The most likely scenario is a significant test of 92.32 but the multiple levels of resistance upcoming in USD/JPY likely means that the bulk of the gain has already passed.

Fundamentally, there was significant evidence that USD shorts were getting squeezed for much of December. Year-end demand has also pressed the U.S. dollar higher. Those factors are diminishing in much the same way as the chart is starting to look tired.

On the other hand, some of the U.S. dollar strength has come from optimism about a U.S. economic recovery and the sense that the Fed will hike by mid-year. The consensus has been shifting in this direction, even though we have yet to hear anything significant from the Fed.

What is clear is that the Bank of Japan will not be hiking rates any time in 2010 and likely not in the early part of 2011. If an economic recovery takes hold in places like Australia, New Zealand, Canada and even the United States. There are market participants eager to get involved in the yen-weakening carry trade.