CURRENCIES: Dollar Hits Two-month High Against Yen As Bond-yield Gap Exploited

By Rachel Koning Beals Features Dow Jones Newswires

Bank of Japan Governor Haruhiko Kuroda reiterated the central bank's resolve to maintain its massive stimulus program

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The dollar traded at a two-month high against the yen Monday, helping to lift a broader dollar index, as the gap between U.S. rates and Japanese rates favored the U.S. currency for now.

Generally, traders were hesitant to take aggressive positions ahead of an appearance by Federal Reserve Chairwoman Janet Yellen later this week that could shed further light on any shift in monetary policy differentials, as the Fed has so far signaled its willingness to raise interest rates even with the economy holding back.

Dollar-yen gained 0.3%. The dollar was buying Yen114.21, up from Yen113.91 late Friday. On Monday, the yen came within a whisker of revisiting a four-month low against the dollar, with investors piling on to their bets that exploit the divergence between rising government bond yields in the U.S. and Europe and low Japanese equivalents. The dollar advanced some 1.5% against its Japanese counterpart for all of last week. Euro-yen was up 0.2%.

The ICE Dollar Index , which measures the dollar against a basket of six currencies including the yen, was 0.1% higher to 96.13.

The index gained 0.4% last week, supported modestly by an upbeat report on jobs created in June, which should bolster the Fed's efforts to follow through with buck-boosting monetary policy. The U.S. economy added 222,000 jobs (http://www.marketwatch.com/story/us-adds-222000-jobs-in-june-as-hiring-surges-2017-07-07)last month, while the unemployment rate ticked up to 4.4% as more workers entering the job market, and figures for April and May were increased, the closely watched monthly report from the Labor Department showed.

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Still, one source of weakness was lackluster wage inflation, which analysts said limited the dollar's upside.

The buck has been held back against some rivals by a global bond selloff, a new "taper tantrum" in Europe especially that pushed bond yields there and the euro sharply higher amid hawkish talk from global central bankers signaling a desire to end easy-money polices. Recent meeting minutes from the European Central Bank released underscored that hawkish pivot, which means the U.S. Fed is no longer the only major central bank adopting an increasingly hawkish stand.

Still, as far as the yen is concerned, bond yields have diverged in recent weeks, helping "carry trades" that borrow cheaply in one currency to buy in another with higher interest rates. The spread between 10-year U.S. Treasury yields and its Japanese counterpart traded at its widest in two months.

Read: Central banks are now closer to getting it wrong, Ray Dalio says (http://www.marketwatch.com/story/lets-thank-central-banks-but-theyre-closer-to-getting-it-wrong-now-ray-dalio-says-2017-07-07)

On Monday, Bank of Japan Governor Haruhiko Kuroda reiterated the central bank's resolve to maintain its massive stimulus program until inflation is stably above its 2% target.

His comments "seemed to amplify yen selling pressure. He struck a firmly dovish tone, pouring cold water on recent speculation that the central bank might back away from negative interest rates next year," said Ilya Spivak, currency strategist with Daily FX.

As for the Fed, Janet Yellen's semi-annual testimony to Congress is a major highlight of this week, where she may hold out the possibility for another Fed rate hike before the end of the year.

"Fed Chair Yellen's Congressional testimony on Wednesday may provide USD-JPY with its next boost should she underline the Fed's increased focus on financial conditions...the impact that expanding bank balance sheets, including in to higher yielding assets, have had," said Hans Redeker, currency analyst at Morgan Stanley, in a note.

The euro pulled back, fetching $1.1391, compared with $1.1402 late Friday in New York. The euro weakened against the dollar over last week by 0.2%.

Germany's Destatis said German exports leapt 14.1% in May compared with a year ago in non-adjusted terms, on strong demand from outside the European Union.

The pound slipped to $1.2883 from $1.2887 on Friday. It booked a 1.2% loss over last week.

(END) Dow Jones Newswires

July 10, 2017 07:21 ET (11:21 GMT)