The dollar climbed to a 4-1/2-year high against the yen on Thursday for a second straight day ahead of a Bank of Japan policy meeting and a report on US consumer inflation that could determine whether US Treasury bond yields extend a six-week climb.
Since April, the benchmark 10-year US Treasury note yield has risen around 60 basis points as dealers priced out any chance of a Federal Reserve interest rate cut in 2007, helping the dollar advance from record lows against the euro.
Globally bond yields have been rising on expectations that economic growth will be sustained and central banks around the world will continue to raise interest rates to contain inflation. But the pace at which Treasury yields have been rising has surpassed those of other major economies, offering investors a bigger incentive to put money into dollar-denominated assets.
A report released on Thursday showed that on a year-on-year basis, the US core producer price index was up 1.6 percent in May compared with 1.5 percent in April, leaving open the possibility that Friday's consumer inflation data could reflect upward pressures. Core prices exclude food and energy costs.
"This morning's wholesale inflation data was marginally dollar positive as it highlighted lingering potential inflation risk and compounded the view the Federal Reserve will not cut interest rates this year," said Alex Beuzelin, senior market analyst at Ruesch International in Washington.
Late afternoon in New York, the dollar changed hands at 122.90 yen, up 0.2 percent, after earlier touching 123.13 yen, the highest since December 2002. The dollar is up 3.3 percent versus the yen in 2007 so far. The euro was largely unchanged against the dollar at $1.3308. Against the yen, the euro climbed 0.2 percent to 163.58 yen.
"Critical support for euro/dollar comes in the $1.3250-70 area and we will find out if there is indeed a floor there if we get CPI tomorrow that's as big a surprise, we could test lower levels," said Greg Anderson, senior currency strategist with ABN Amro in Chicago.
The dollar rose for the sixth consecutive session against the Swiss franc, up 0.2 percent to 1.2465 francs. The franc, one of the lowest-yielding major currencies, received no support from a widely expected Swiss National Bank rate increase or from upward revisions to its growth and inflation views.
The Australian dollar was one of the biggest movers on the day among major currencies, down 0.5 percent to US $0.8356, after the governor of the Reserve Bank of Australia said the favourable near-term inflation outlook gave the bank more time to assess the need for higher interest rates.
The Bank of Japan is widely seen keeping rates at 0.5 percent on Friday, but with expectations running high for a rate hike in August, investors will closely watch the post-meeting news conference by BoJ Governor Toshihiko Fukui.
A Reuters poll showed economists expect the BoJ to raise interest rates to 0.75 percent in August and then again early next year to 1 percent - which would still leave Japan's rates among the lowest in the world.
A string of stronger-than-expected readings on the US economy in the last several weeks, including the highest retail sales growth since January 2006, has lifted growth expectations and sparked some concerns about inflation. Above-forecast May US CPI data could lead markets to lift Treasury yields and hammer the low-yielding yen against the resilient dollar.
"The combination of stronger consumer spending and higher inflation will keep the Federal Reserve hawkish, which should continue to fuel demand for carry trades," said Kathy Lien, chief strategist with Forex Capital Markets in New York, referring to the trade where investors borrow cheaply in yen to invest in higher-yielding currencies.
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