The dollar was testing a five-week high versus major peers on Monday, particularly gaining against the rate-sensitive Japanese yen, as investors' bets that the Federal Reserve will keep monetary policy tight for longer sent U.S. yields higher.
Those expectations will be challenged or underscored by the week's main event - the release of U.S. consumer price data on Tuesday - which loomed over Monday trading.
The dollar rose as much as 1% to 132.76 yen, nearing last week's 132.9, the highest for the dollar against the yen since Jan 6. JPY=EBS
The euro EUR=EBS hit a one-month low of 1.0656 in Asia trading, but was last at $1.0693, up 0.15%. The British pound GBP=D3 rose 0.3% to $1.2096, staying not far from a one-month low of $1.1961 hit last week. GBP=D3
That left the dollar index =USD , which tracks the U.S. currency against six major peers, at 103.55, steady on the day having earlier neared last week's one-month top of 103.9.
Higher U.S. yields were a major driver of the softer yen. The benchmark 10-year U.S. treasury yield hit a fresh six-week high of 3.755% US10YT=RR and the two-year yield US2YT=RR hit its highest since late November at 4.543%.
"That rising U.S. yield pressure is likely behind the faltering yen rolling back lower, taking dollar/yen back above 132.00 after significant volatility last week when it emerged that the dovish Amamiya would not be the nominee to replace Kuroda at the helm of the BoJ on his exit in April," said John Hardy, head of FX strategy at Saxo Bank.
The Japanese currency had dropped sharply last year, reaching a 32-year low of 151.94 per dollar as U.S. rates rose while Japanese rates stayed pinned near zero.
It has regained ground this year as U.S. rates looked like they were near their peak, and on expectations the Bank of Japan will move away from its ultra-loose stance, but both now look like they will come later than had been expected.
Sources said on Friday that former Bank of Japan board member Kazuo Ueda is set to become the next governor. In an interview the same day, Ueda said it was appropriate for the BOJ to maintain its current ultra-easy policy.
"Markets are starting to understand that the new governor won't be as hawkish as (investors) initially thought," said Naka Matsuzawa, chief strategist at Nomura in Tokyo.
Meanwhile, in the United States, much stronger jobs data released at the start of February suggests the economy is performing strongly, meaning there is less danger for the Fed in keeping rates elevated.
As a result, "This week’s US CPI is one of the most pivotal prints in recent memory," Barclays analysts said in a note.
"The dollar has rallied on the back of ... US labour market strength but the evolving narrative is set to be updated yet again on Tuesday."
Money markets are positioned for a peak in U.S. interest rates of just below 5.2% around July, compared with the current target rate of 4.5-4.75%, but have mostly walked back expectations of major rate cuts later in the year. FEDWATCH
Elsewhere, the Swiss franc strengthened after Swiss inflation data came in higher than expected. The dollar slid to as low as 0.9213 Swiss francs. CHF=EBS
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