CURRENCIES: Dollar Hits 4-mo. High Against Yen As Central Banks Shine Light On Interest-rate Gap

By Rachel Koning Beals Features Dow Jones Newswires

Bank of Canada seen raising interest rates for first time in nearly 7 years Wednesday

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The dollar mostly rose Tuesday, including hitting a four-month high against Japan's yen, and has now gained each trading day since the release of U.S. jobs data backed expectations for another Federal Reserve interest-rate hike this year.

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

The dollar gained 0.3% against the yen . It was buying Yen114.32, up from Yen114.04 late Monday. Dollar-yen traded as high as 114.48, a four-month high, with investors adding to bets that exploit the divergence between rising government bond yields in the U.S. and Europe and low Japanese equivalents. The spread between 10-year U.S. Treasury yields and its Japanese counterpart was at its widest in two months.

Read:Why relying on yen weakness for carry trade is risky (http://www.marketwatch.com/story/why-relying-on-yen-weakness-for-carry-trade-is-risky-2017-07-10)

With rate differentials in play, central banks dominate the marquee for markets this week.

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Fed Chairwoman Janet Yellen gives two days of testimony to lawmakers on Wednesday and Thursday that could shed further light on any shift in monetary policy, with her views on a slow policy unwind likely bolstered by a June payrolls reading that was tempered by tame wage inflation (http://www.marketwatch.com/story/us-adds-222000-jobs-in-june-as-hiring-surges-2017-07-07).

The Bank of Canada, which meets Wednesday, is widely expected to raise interest rates after strong signals in speeches for such action over the past month.

"Wednesday remains the most notable session of the week, with Fed Chair Janet Yellen testifying ... and the Bank of Canada potentially raising interest rates for the first time in almost seven years," said Craig Erlam, senior analyst at Oanda. "A rate hike from the BoC would come as a number of the [Group of 7] central banks adopt a more hawkish stance, despite the economic data not necessarily supporting such a move."

The Canadian dollar rose against its U.S. counterpart, trading at C$1.2922 compared with C$1.2891 late Monday 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 its U.S. counterpart -- 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.

In fact, the buck has been held back by this shift at other banks and by a global bond selloff, particularly pronounced in Europe, where 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.

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)

The dollar was softer against its U.K. rival. The pound rose to $1.2913 from $1.2881 on Monday. It had booked a 1.2% loss over last week.

Still, caution surrounding the pound persists in some analysis. Bank of England Governor Ben Broadbent speaks later on Tuesday.

"A more measured speech by Broadbent and softer employment and wage numbers [Wednesday] would reinforce our view that the sterling correction from $1.3042 should extend further," said RBC currency analysts in a note.

The euro pulled back slightly, fetching $1.1397, compared with $1.1399 late Monday in New York.

(END) Dow Jones Newswires

July 11, 2017 07:17 ET (11:17 GMT)