The dollar set a fresh six-year high against the yen on Friday, continuing to draw strength as investors bet that the US Federal Reserve could send a hawkish signal at its policy meeting next week. The dollar touched a high of 107.39 yen, its strongest level since September 2008, and last traded at 107.35 yen, up 0.2 percent from late US trade on Thursday. For the week, the greenback is up more than 2.1 percent versus the yen, putting it on track for its biggest weekly gain in almost three months.
Investors have been buying the dollar ahead of the Federal Reserve's September 16-17 policy review amid some expectations that the central bank could signal an earlier rise to interest rates. US Treasury yields have been adjusting to that prospect with the two-year yield now not far from a three-year peak of 0.5900 percent set in July.
"The main story is a continued rise in US bond yields... that's probably the biggest driver higher of dollar/yen at this point in time," said Mitul Kotecha, head of FX strategy Asia-Pacific for Barclays in Singapore. The benchmark US 10-year Treasury yield edged higher on Friday to touch a one-month high of 2.565 percent. The dollar held steady against a basket of major currencies at 84.329, holding within striking distance of Tuesday's 14-month high of 84.519.
The rise in US yields and a pick-up in implied volatility have taken a toll on carry currencies from the Australian dollar to those in emerging markets. The Aussie hit a fresh six-month low of $0.9060 on Friday and last traded at $0.9068, down 0.3 percent on the day. "If we see a hawkish Fed next week, we'll be heading back to 90 cents in no time," said Annette Beacher, head of Asia-Pacific Research at TDSecurities.
The kiwi dollar touched a seven-month low of $0.8157. It last traded at $0.8167, down 0.2 percent from late US trade on Thursday. Sterling and euro were steadier, although still trading heavily on domestic factors. Sterling touched a one-week high of $1.6277 earlier on Friday, after a YouGov poll showed supporters of keeping Scotland in the United Kingdom gained back a narrow lead over separatists just one week before Scots vote in a referendum on independence.
Jitters about a break-up of the United Kingdom has seen sterling slide more than 2 percent in the past two weeks. It skidded to a 10-month low of $1.6052 on Wednesday, but has since managed to claw back some ground. Sterling last traded at $1.6237, down 0.1 percent on the day. The euro held steady at $1.2921, holding above a 14-month trough of $1.2859 set on Tuesday after the European Central Bank last week surprised markets with a fresh round of policy easing. In comments published on Thursday, ECB Vice President Vitor Constancio said the ECB would prefer not to be forced to spend billions of euros buying government debt, a process known as quantitative easing, but it cannot rule it out.