Dollar rises on Fed rate hike bets, hits one-month high vs. flagging yen

by Jonathan Adams

The dollar hit a two-month peak against a basket of currencies and a one-month high against the yen on Monday, after Federal Reserve Chair Janet Yellen fanned expectations for U.S. rate hikes in the near term.

Political developments in Tokyo were also supporting the dollar against the yen. Japanese Prime Minister Shinzo Abe said he would delay a sales tax hike scheduled for next April by two and a half years, a senior ruling party official said on Monday.

Japan is also seen compiling a supplementary budget to boost the sputtering economy, a move which is widely expected to be followed by further monetary easing by the Bank of Japan, all of which was keeping the yen on the back foot amid lower volumes in Europe.

London markets are shut for a public holiday while the U.S. is closed for Memorial Day.

The dollar rose above 111.00 yen for the first time since late April, reaching 111.39 yen in early European trading, up nearly 1 per cent on the day. For the month, the dollar is on track for its best show since late 2014 against the yen JPY=.

Against a basket of currencies, the dollar was up 0.35 per cent at 95.879 .DXY, while the euro struggled near 2-1/2 month lows of $1.1097 (£0.76) hit in the Asian session EUR=.

Yellen said on Friday a rate increase in the coming months “would be appropriate,” if the economy and labour market continued to improve

“Yellen’s comments have raised the chances for a June or July rate hike, supporting the dollar,” said Niels Christensen, FX strategist at Nordea, a large Nordic bank. “A lot though will depend on the data that comes out this week. A good set of numbers will no doubt add to dollar strength.”

This week U.S. non-farm payrolls and the Institute for Supply Management are due and a solid employment report for May, due out on Friday, could heighten expectations for a June move. ECONUS

As recently as early May a Fed rate hike in June was completely off the agenda. But after a string of good data and the Fed officials’ comments, the likelihood of a hike based on CME’s Fedwatch has reached 28 per cent.

Meanwhile, prospects for a delay of Japan’s sales tax hike boosted Japanese stocks and dimmed the allure of the safe haven yen, traders said.

“Fiscal policy is positive for the yen, but if the stimulus is accompanied further monetary easing, then it is a yen-weakening factor as brings the concept of ‘helicopter money’ to mind,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.

While a delay in the sales tax hike could shield the floundering economy it means less income for the cash-strapped government, possibly prompting credit rating agencies to downgrade Japan’s sovereign rating.

“A potential credit downgrade will also hurt the yen…,” Yamamoto added.

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