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

By Anora Mahmudova, MarketWatch , 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. and Japanese rates favored the U.S. currency for now.

Traders were generally 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. The Fed has so far signaled willingness to raise interest rates even with the economy holding back.

The dollar gained 0.2% against the yen . It was buying Yen114.14, 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 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 last week. The euro was up 0.2% against the yen.

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

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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 entered the job market and figures for April and May were increased, the closely watched monthly Labor Department report showed.

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, particularly pronounced in Europe, where bond yields and the euro have moved higher as global central bankers have signaled a desire to end easy-money polices.

Recently released meeting minutes from the European Central Bank underscored that 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 was 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.

Kuroda's comments "seemed to amplify yen selling pressure," said Ilya Spivak, currency strategist with Daily FX.."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."

As for the Fed, Janet Yellen's semiannual testimony to Congress is a major highlight of this week. 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 slightly, 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 $1.2871 from $1.2887 on Friday. It booked a 1.2% loss over last week.

The Canadian dollar weakened against its U.S. counterpart, trading at C$1.2906 compared with C$1.2875 late Friday in New York. The loonie rallied on Friday to its highest level in 10 months, after better-than-expected job growth in Canada.

The strength of the Canadian dollar since early May -- it's up more than 6% against the dollar -- has been driven by increasing expectations that the Bank of Canada will join the Fed as the second major central bank raising interest rates as the economy continues to expand rapidly.

Over the short term, however, analysts expect some sort of a correction in the Canadian dollar due to net short positioning in the futures markets.

Read: Short-squeeze could be coming for Canadian dollar bears (http://www.marketwatch.com/story/short-squeeze-could-be-coming-for-canadian-dollar-bears-2017-06-05)

" speculators retain a net short Canadian dollar position, while they are net long the other dollar-bloc currencies. The Canadian dollar has appreciated in seven of the past 10 weeks, and this has left it technical stretched. However, the indicators have not turned," said analysts at Brown Brothers Harriman in emailed notes.

(END) Dow Jones Newswires

July 10, 2017 09:44 ET (13:44 GMT)