Funding currencies under pressure as U.S., UK hike bets firm Yen...

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    • Funding currencies under pressure as U.S., UK hike bets firm
    • Yen could fall through 118/dollar - analysts
    • Sterling touches 22-month peak vs euro

    The yen was pinned near a five-year low on the dollar on Wednesday and nursing losses on other crosses as traders wagered Japan would lag a looming wave of global policy tightening as inflation gallops ahead around the world.

    The yen JPY=EBS tumbled through support, which now turns resistance, around 115.50 per dollar on Tuesday to hit the five-year trough at 116.35.

    It hovered around 116.05 through a quiet Asian session. The yen also dropped through its 200-day moving average to a two-month low of 131.45 per euro EURJPY= , recovering slightly to 131.00 in Asia. It made a more than six-year low against the Swiss franc CHFJPY= and a seven-week trough on the Aussie AUDJPY= , recovering slightly from those levels on Wednesday.

    "Sharply higher COVID-19 case numbers in the U.S. (and a little higher in China) appear to be primarily boosting supply-chain concerns and fears of higher inflation in the U.S., rather than boosting growth concerns," said Nomura economist Andrew Ticehurst.

    This has led to a sharp jump in U.S. Treasury yields in the first trading days of the year and the widened gap on Japanese yields - anchored by the central bank - has hurt the yen.

    "The 2017 (dollar/yen) high at 118.60 may be the next natural target, and cannot be explicitly ruled out for now," said Terence Wu, FX strategist at OCBC Bank in Singapore.

    A similar dynamic has the euro under pressure as European policymakers are likely to be behind peers in Britain and the United States on tightening. The common currency EUR=EBS held near a two-week low against the dollar at $1.1288 and hit an almost two-year trough of 83.32 pence EURGBP= .

    The risk-sensitive Australian and New Zealand dollars struggled to resume an attempt to rally as fears of Omicron derailing the world's recovery subside.

    The kiwi NZD=D3 last bought $0.6803 and the Aussie AUD=D3 $0.7228. Both remain shy of resistance around $0.6857 and $0.7270 respectively. The U.S. dollar index =USD was rangebound at 96.269.

    Minutes from the Federal Reserve's December meeting, due to be published at 1900 GMT, could underscore U.S. policymakers' newfound sensitivity to inflation and their readiness to act. Partial U.S. labour data on Wednesday and non-farm payrolls on Friday will also be watched for a guide to the trajectory.

    Fed Funds futures 0#FF: show traders see rates lifting off by May. Analysts at Standard Chartered now expect 25-basis point hikes in March and June rather than one hike in September.

    U.S. two-year US2YT=RR and five-year US5YT=RR yields stand near pandemic highs and benchmark 10-year yields US10YT=RR are up about 14 basis points this week.

    Against that leans some element of caution as markets remain thinned by holidays.

    "Despite the explosive rally in USD/JPY, I still can't get excited about the idea of a stronger USD right now," said Brent Donnelly, trader and President at analytics firm Spectra Markets.

    "The rates move certainly has grabbed everyone's attention but it's hard to know how much to read into a move on the first trading day of the year. The big question remains: Can the Fed hike more than a few times without breaking everything?"

    Sterling, meanwhile, has rallied about 2.7% on the dollar in a dozen trading days since Dec. 20 as traders also reckon surging Omicron cases in Britain won't deter the Bank of England from lifting rates.

    Prime Minister Boris Johnson is resisting lockdown measures and hoping caution and vaccinations can prevent serious illness despite surging cases. The pound GBP=D3 last bought $1.3527.

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