The dollar gained on the yen on Monday as the gap between US and Japanese yields widened in the greenback's favour, but the US currency may face more selling if forthcoming US economic data disappoints. The two-year US Treasury yield rose to 0.77 percent, four basis points above Friday's close and up 14 basis points in five days, widening its gap over comparable Japanese yields.
That helped push the dollar to a session peak of 81.84 yen, its highest since March 18, when the Bank of Japan and other major central banks intervened to stop runaway yen gains. It was last up 0.5 percent at 81.71 yen. The euro, meanwhile, held above $1.40 as markets braced for higher eurozone interest rates.
Some of the upward pressure on the dollar and US yields was sparked by the Philadelphia Federal Reserve president, who on Friday said the central bank would have to tighten policy soon to avoid inflation. US employment data is due on Friday, and economists polled by Reuters expect a 190,000 job gain in March, steady with the 192,000 jobs added the prior month.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said the euro was flashing similar signals. While it fell Friday and hit a one-week low near $1.40 overnight, it was last up 0.1 percent at $1.4096. That was well within an uptrend that persisted through last week's credit downgrade of Portugal and expectations that it could soon become the third indebted eurozone country to require emergency aid.
Meanwhile, the latest positioning data showed that currency speculators had increased bets against the US dollar to nearly $30 billion. The market expects the European Central Bank to lift interest rates on April 7, a view that gained credence Monday when ECB President Jean-Claude Trichet said inflation rates are above the central bank's price stability target.
Chandler said the euro gains may falter after an ECB rate hike, partly on the view that the eurozone economy is too fragile to withstand a series of interest rate hikes. The possibility of higher interest rates as early as next month softened concerns about Germany's ruling party losing a key state election.
The dollar may also drift back toward 80 yen in the near term, said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank, particularly if Japanese investors repatriate funds ahead of month end on Thursday. One-month dollar/yen volatility traded around 10 percent, compared with around 20 percent when the yen rose to a record high of 76.25 earlier this month. Should volatility pick up, though, the G7 could step in again to weaken it, Eliasson said. Japan and other Group of Seven countries joined forces to stem yen appreciation earlier this month after it hit a record high near 76 per dollar.