By Hiroyuki Kachi
The dollar gained further strength in early Asia trade Friday, pushing it beyond the Y110 mark against the yen for the first time in five months on the back of positive U.S. data and comments about a looming U.S. rate increase from Federal Reserve chief Janet Yellen.
The greenback gained traction to hit Y110.34 earlier in the morning session, maintaining momentum from overnight gains. Around 0100 GMT, the U.S. currency was changing hands at Y110.12, compared with Y110.11 late Thursday in New York.
Ms. Yellen told lawmakers Thursday that a rate increase could come "relatively soon" and cited good progress in the U.S. economy. Data released Thursday showed U.S. inflation firming, housing starts rising at the fastest pace since August 2007 and weekly jobless claims falling to the lowest level since 1973.
While the dollar was also up against other currencies in Asia, the movement in the yen was the sharpest. The WSJ Dollar Index, a measure of the U.S. dollar against a basket of major currencies, was up 0.06% at 91.27. The euro was at $1.0615 from $1.0620 late Thursday. The dollar was also higher against the Australian dollar and the Singapore dollar.
Investors looking at the dollar and yen are becoming increasingly mindful of a gap in U.S.-Japan interest rates differentials that is set to widen as U.S. rates climb while the Bank of Japan keeps a lid on rates.
"The pace of increase in [the U.S.] yields is rapid," said IG Securities market analyst Junichi Ishikawa. "It is highly possible that expectations for a faster pace of rate increase next year is causing higher yields," saidIshikawa, adding that the upcoming "dot plot" showing Fed policy makers' predictions for the level of the Fed funds rate will be closely scrutinized by investors.
The dollar has staged a strong rally following Donald Trump's victory in the U.S. presidential election last week. Expectations remain high for the new administration to boost fiscal spending and lower taxes in a move that will likely accelerate inflationary pressure, prompting the Fed to raise rates at a faster pace, Mr. Ishikawa said.
That is in stark contrast with monetary policy in Japan. The BOJ on Thursday offered to buy an unlimited amount of Japanese government bonds at fixed rates for the first time since the introduction of a new policy framework in the first clear sign that the central bank intends to take action to keep a lid on rising yields following a recent global bond rout.
But not all market watchers are convinced the upward move in the dollar will continuethrough the coming year.
Expectations for the new U.S. administration will likely help support the dollar's strength for the time being, but a weaker dollar and a higher yen is "more likely scenario" next year, said Minori Uchida, head of Tokyo global markets research at Bank of Tokyo-Mitsubishi UFJ.
"It's quite unlikely to see something that goes beyond what investors are expecting now," said Mr. Uchida, referring to Trump's likely policies. In addition, market players need to stay cautious about a possible turnaround in sentiment given risk factors such as the OPEC meeting later this month, weakness in emerging currencies and the sustainability of U.S. stock market strength.
Write to Hiroyuki Kachi at Hiroyuki.Kachi@wsj.com
(END) Dow Jones Newswires
November 17, 2016 20:20 ET (01:20 GMT)
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