LONDON/TOKYO (Feb 13): The dollar hit a two-week high against the yen on Monday, as investors focused again on the U.S. reflation trade which dominated the aftermath of Donald Trump's election in November but has stalled this year.
All eyes are fixed on testimony by Federal Reserve chief Janet Yellen this week, after signs that other policymakers at the U.S. central bank are leaning towards more hikes in interest rates this year than the two currently priced in by markets.
That would help the dollar and reports that Trump did not even discuss the currency or its strength at weekend talks with Japanese premier Shinzo Abe, did likewise.
The new president drove the greenback to its strongest gain since mid-December last week by promising a "phenomenal" tax reform for U.S. companies. Investors hope that signals the focus of day-to-day commentary is shifting away from trade protectionism and security, and towards economic growth.
"Is Trumpflation back with a vengeance? Probably investors will want to wait but it does seem that all of the cards for another bull run for the dollar may be falling back into place," said Viraj Patel, a strategist with Dutch bank ING in London.
"There can only be upside risk going into Yellen's testimony this week."
The dollar was up half a percent at 113.72 yen in morning trade in London, having reached as high as 114.17 yen in Asian trading. It was steady against the euro at US$1.0638 and around 0.4% lower at US$1.2534 to sterling.
Yellen will testify in Congress on Tuesday and Wednesday, after giving markets little new to go on when the bank upgraded its inflation views earlier this month. The latest U.S. producer inflation numbers are due before she speaks on Tuesday and are followed by consumer price data a day later.
"Markets are pricing only a 22% probability of a March Fed move, the question is whether she wants to nudge it closer to fifty percent," said Nick Parsons, head of currency strategy at National Australia Bank in London.
"The economics all suggest the dollar should be moving higher but the politics don't always play along to the same tune and we have the president's Twitter feed to contend with."
China's yuan was also a mover overnight, weakening in the face of the dollar's strength at the end of last week to hit its lowest in a month.
The yuan is expected to fall further this year and another bleed of Beijing's FX reserves last week has analysts debating whether a more dramatic weakening is on the cards. It fell as low as 6.8838 per dollar in offshore trade on Monday.
"Following the Jan/Feb correction, we still expect some modest broad dollar strength to unfold over the first half of this year," JP Morgan said in a monthly report.
"But we have trimmed the extent of dollar strength from already relatively modest expectations, now only expecting the dollar index to peak 3.3% stronger by mid-year from current levels."