The dollar soared to its highest in nearly three years versus the Japanese yen on Monday as investors remained confident the U.S. Federal Reserve will announce a tapering of its massive bond-buying next month despite softer U.S. payrolls figures.
Traders shrugged off Friday's mostly lacklustre jobs report, pushing U.S. bond yields higher. The yen, which is known for being particularly sensitive to interest rate differentials, hit 113 yen per dollar for the first time since December 2018 in morning London trade.
The Japanese currency was also hurt by a slight tilt towards riskier currencies, with the Australian dollar gaining on the greenback, as oil prices hit multi-year highs on the back of the energy crisis griping major economies amid a pick-up in economic activity.
With Japanese government bond rates well anchored and the Bank of Japan keeping policy on ice, expectations of a Fed tapering announcement soon should press U.S. Treasury yields higher, favouring higher dollar-yen ranges, said Roberto Cobo Garcia, head of FX strategy at BBVA.
The main risk for the dollar-yen pairing this week comes from U.S. data, with consumer price index and retail sales both due on tap.
"Investors need to be a bit careful, because if inflation and consumer spending numbers this week fall short, it will be very hard for the dollar to hold onto its gains," said Kathy Lien, managing director at BK Asset Management.
Overall, the dollar index, which measures the greenback against a basket of peers, was up 0.054% at 94.215, not far from its one-year high of 94.504 touched earlier this month.
U.S. fixed income markets are closed on Monday for a holiday but the yield on benchmark 10-year Treasuries hit a four-month high of 1.617% on Friday, even after data showed the U.S. economy created the fewest jobs in nine months in September, missing forecasts.
However, data for August was revised up sharply and the jobless rate dropped to an 18-month low, suggesting fears of labour shortage remain justified, keeping inflation worries alive and giving the Fed justification to reduce its emergency stimulus begun last year.
The Australian dollar hit its strongest since Sept. 14, and was most recently up 0.49% at $0.7346, helped by strong commodities prices and a partial reopening of Sydney, Australia's largest city.
Concern about inflation is not limited to the United States, with supply disruptions and rising commodity prices affecting many countries.
The British pound held firmer at $1.3627, extending its recovery from a nine-month low set late last month, on growing expectations the Bank of England could raise interest rates to curb inflation.
Canadian markets were closed for a holiday, and the loonie was down 0.12% at C$1.24595, having earlier hit a two-month high of C$1.24465 thanks to surprisingly strong Canadian payrolls data and lofty oil prices.
In cryptocurrencies, bitcoin gained 4.1% to a new five-month high of $56,959, extending gains made over the weekend, while ether also rose 4.72% to $3,583.