NEW YORK: The dollar edged higher against a basket of currencies on Tuesday and touched a four-month high against the yen on the back of a 25 basis-point rise in 10-year US government bond yields over the past two weeks.
The greenback was up 0.32 percent to 114.4 yen, after hitting 114.47 yen, its highest since March 15, earlier in the session.
"The dollar is enjoying an increased yield appeal relative to the Japanese yen," said Omer Esiner, chief market analyst at Commonwealth FX in Washington.
Investors have dumped euro zone government bonds over the last two weeks on expectations the European Central Bank (ECB) would unwind extraordinary stimulus sooner rather than later. The resulting surge in euro zone yields also helped the benchmark Treasury yield climb to two-month highs on Friday.
Japanese government bond (JGB) yields had also tracked the rise in their US and euro zone counterparts. Last week, however, the Bank of Japan stepped in and halted the move through a special debt-buying operation, intent on keeping yields anchored close to zero.
With US yields free to rise, the spread between 10-year Treasury and JGB yields is the widest it has been in about two months, contributing to the dollar's strength against the yen.
The dollar index, which tracks the greenback against six major rivals, was up 0.06 percent to 96.082.
Investors were waiting for US Federal Reserve Chair Janet Yellen's semi-annual monetary policy testimony before Congress on Wednesday and US consumer inflation data on Friday, for the next big cue for currency markets.
The Canadian dollar fell against its US counterpart as oil prices fell and traders await an interest rate hike decision by the Bank of Canada on Wednesday.
The greenback gained against the New Zealand dollar with the kiwi slipping to its lowest since June 22 and dealers pointing to a sluggish report on credit card spending after a brief dip following news of an earthquake off the country's South Island.
Sterling slipped to a near two-week low against the dollar and the euro after a speech by Bank of England Deputy Governor Ben Broadbent left the outlook for interest rates unanswered.
"There is too much noise in the market in relation to interest rate but the reality is that we do not see any interest rate hike anytime soon," said Naeem Aslam, chief market analyst for Think Markets in London.