(This story changes dateline to OTTAWA, Aug 7 from TOKYO, Aug 8)
By Kevin Buckland
OTTAWA – The dollar extended it best rally against the yen since mid-June on Monday, buoyed by higher Treasury yields after blockbuster U.S. jobs data lifted expectations for more aggressive Federal Reserve policy tightening.
The greenback was last 0.31% higher at 135.42 yen, and earlier rose to 135.585 yen, its highest since July 28, after surging 1.57% in the previous session, its biggest single-day gain since June 17.
The dollar index, which measures the currency against six counterparts, stood at 106.77, from a Friday peak of 106.93, also the strongest since July 28.
Traders currently see a 73.5% probability the Fed continues the pace of 75 basis-point interest-rate increases for its next policy decision on Sept. 21, from about 41% before surprisingly strong payrolls data on Friday raised worries that wage growth would fuel inflationary pressures.
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The focus this week will be on the U.S. consumer price index due Wednesday, and whether it can cement the odds for super-sized rate rises. Analysts polled by Reuters expect annual inflation eased to 8.7% in July from 9.1% previously.
“It will likely take a number below 8.4% to get the odds of a 50bp hike in September as the default setting,” although that “seems unlikely,” Chris Weston, head of research at Pepperstone, wrote in a note.
“I wouldn’t want to be short USDs if the CPI print comes in above 9%.”
The two-year Treasury yield remained elevated at 3.2628% in Tokyo trading on Monday, after reaching 3.3310% at the end of last week, a level not seen since mid-June.
The 10-year yield stood at 2.8470%, sticking close to the two-week high of 2.8690% touched Friday.
The negative spread between the two- and 10-year yields was 42 basis points, having hit 45 basis points on Friday, the most since August 2000. An inverted yield curve is widely interpreted as a pre-cursor to a recession.
Elsewhere, the euro sank 0.35% to $1.01595 while sterling slid 0.19% to $1.2050.
The British pound dropped as low as $1.2004 on Friday, a day after the Bank of England raises interest rates by an as-expected half a point at the same time as warning of a protracted downturn.
“The Bank of England’s forecast of recession underpins the vulnerability of the pound going forward,” Rabobank senior FX strategist Jane Foley wrote in a note, predicting sterling could dip to $1.14 within three months.
Meanwhile, the Australian dollar slipped 0.06% to $0.6907, while the New Zealand dollar fell 0.19% to $0.62315.
(Reporting by Kevin Buckland; Editing by Sam Holmes)