(Updated)

Dollar extends gains against yen as big Fed hike bets ramp up

Dollar extends gains against yen as big Fed hike bets ramp up
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OTTAWA (Aug 8): The dollar firmed slightly against the yen on Monday (Aug 8), building on strong gains made at the end of last week, after surprisingly strong US jobs data lifted expectations for more aggressive US Federal Reserve (Fed) policy tightening.

The greenback was last 0.1% higher at ¥135.155 (RM4.46), and earlier rose to ¥135.585, its highest since July 28, after surging 1.57% in the previous session for its biggest single-day gain since June 17.

The dollar index, which measures the currency against six counterparts, stood at 106.54, not far off from a Friday peak of 106.93, also the strongest since July 28.

Traders currently see a 70.5% 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 the strong payrolls data last Friday raised worries that wage growth would fuel inflationary pressures.

The focus this week will be on the US consumer price index (CPI) due on Wednesday, and whether it can cement the odds of super-sized rate rises. Analysts polled by Reuters expect annual inflation to have 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 50-basis-point hike in September as the default setting," although that "seems unlikely", Chris Weston, the head of research at Pepperstone, wrote in a note.

"I wouldn't want to be shorting US dollars if the CPI print comes in above 9%."

The two-year Treasury yield eased slightly to 3.2136% 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 2.8140%, marginally down from a two-week high of 2.8690% touched last Friday.

However, the negative spread between the two- and 10-year yields remained a good 40 basis points, having hit 45 basis points last Friday, the most since August 2000. An inverted yield curve is widely interpreted as a precursor of a recession.

"At this time, confidence in the growth outlook is much more important. On a two- to three-year view, the US is increasingly at risk of stagnation given weak consumption and investment," said Elliot Clarke, a senior economist at Westpac.

Elsewhere, the euro sank 0.15% to US$1.01815, while sterling was largely unchanged at US$1.2077.

The British pound dropped as low as US$1.2004 last Friday, a day after the Bank of England raised interest rates by half a point, as expected, while warning of a protracted downturn.

"The Bank of England's forecast of a recession underpins the vulnerability of the pound going forward," Rabobank senior foreign exchange strategist Jane Foley wrote in a note, predicting that sterling could dip to US$1.14 within three months.

Meanwhile, the Australian dollar bounced to US$0.6927, recovering slightly after a 0.8% fall last Friday, while the New Zealand dollar was flat at US$0.62435.