The dollar continued its overnight rally in Asian trading hours on Tuesday, hitting new two-decade highs against the yen, as worries about lingering inflation pushed U.S. bond yields higher.
The greenback also rose slightly against the euro, the pound sterling and the Swiss franc. It also rose against the Australian dollar, with the market split on whether the country’s central bank will raise Australia’s key interest rate later today by a quarter point or opt for something more important.
The Aussie weakened 0.15% to $0.7183, continuing its retreat from a six-week high of $0.72825 hit last Friday.
The dollar hit 132.305 yen on Tuesday – a level not seen since April 2002 – supported by the 10-year Treasury yield rising to 3.05% for the first time in nearly four weeks. The currency pair last traded up 0.17% at 132.12.
By contrast, equivalent Japanese yields are pinned near zero by the Bank of Japan’s yield curve control policy, with central bank governor Haruhiko Kuroda on Monday reiterating an unwavering commitment to a “powerful” monetary stimulus.
The Commonwealth Bank of Australia blames not only yield differentials but also Japan’s reliance on energy imports for the yen’s weakness, although it doesn’t expect much more depreciation from here.
Japan’s current account remains in surplus,” ABC strategist Carol Kong wrote in a note to clients.
“As such, we do not expect a repeat of the rapid USD/JPY appreciation seen in March and April,” and instead expect the dollar to consolidate near the top of its recent range. 126-131 yen, she said.
Strong US jobs data late last week fueled bets that upward price pressures will last longer, potentially forcing more aggressive action from the Federal Reserve.
Consumer price figures due on Friday will provide more clues on the Fed’s rate hike path, ahead of next week’s policy decision, where a half-point hike is widely expected.
“Friday’s inflation report will likely show that inflation is not declining yet, but the odds of a recession are still low,” Edward Moya, senior market analyst at OANDA, wrote in a note.
“Wall Street will have to wait for a few more inflation reports after this one before anyone can confidently decide when the Fed might change its tightening course.”
The dollar index – which measures the currency against six major peers – rose 0.04% to 102.51, extending Monday’s 0.26% advance.
The euro slid 0.09% to $1.0686 ahead of the European Central Bank’s rate-setting meeting on Thursday, traders who have already priced in several bulls and an end to the stimulus buying of obligations, want more clarity on what is to come.
The British pound edged down 0.04% to $1.2523. It gained 0.29% in the previous session as Prime Minister Boris Johnson survived a vote of no confidence but remained weakened.
The dollar gained 0.11% to 0.97125 Swiss francs.