The dollar extended gains against the euro on Tuesday after expectations that the Federal Reserve could raise U.S. interest rates sooner than previously expected, but fell against the yen on safe-haven demand for the Japanese currency.
Traders said that strong U.S. economic data, including the government's nonfarm payrolls report last Friday showing employment returned to pre-recession levels, supported the view that the Fed could take a more hawkish stance on tightening monetary policy at its meeting next week.
Traders' bracing for potential signs of a Fed rate hike earlier than forecast helped push U.S. government bond yields higher, which in turn drew demand for dollars. Expectations for strong U.S. retail sales data on Thursday, in a week of scarce economic data, bolstered views of a Fed rate hike earlier than previously anticipated, traders said. Traders currently expect the Fed to hike rates in the second half of 2015, based on U.S. short-term interest rate futures.
Comments from St. Louis Federal Reserve Bank President James Bullard on Monday also signalled the potential for the U.S. central bank to raise rates sooner. Bullard said encouraging U.S. economic data could prompt him to move forward his view on when rates should be raised.
Dealers have said signs of a rate hike are positive for the dollar, since higher U.S. bond yields encourage capital flows into Treasuries. The benchmark 10-year Treasury note was last down 9/32 in price to yield 2.64 percent.
The U.S.dollar index, which measures the greenback against a basket of six major currencies, was last up 0.17 percent at 80.795, pulling further away from a near two-week trough of 80.240 touched last Friday. The dollar was up 0.28 percent against the Swiss franc to trade at 0.8996 franc.
The was last down 0.30 percent against the dollar near $1.35 but was still higher than a four-month low of $1.3503 hit last Thursday after the European Central Bank announced its monetary stimulus measures. The dollar was last down 0.20 percent against the yen, however, to trade near 102 yen.