By Anora Mahmudova, MarketWatch , Rachel Koning Beals and Suryatapa Bhattacharya

Yen dropped about 10% since election of Donald Trump

The dollar advanced against the yen, euro and pound on Tuesday, supported by Wall Street betting on a certainty of a rate increase by the Federal Reserve in December.

Federal-funds futures are now predicting a 100% probability of a rate increase at the Fed's policy meeting next month, according to CME Group data (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html). However, analysts said this week the dollar will be in a consolidation mode after a two-week rally, following the U.S. presidential election won by Donald Trump.

"With so muchcertainty [over a rate hike], the support for the dollar is likely to continue for some time, but with a holiday-shortened week and big rally over the past two weeks, there will be some profit-taking and easing in the dollar," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.

The U.S. Dollar Index , measuring the buck against a basket of six currencies, was flat at 101.01 late Tuesday in New York, having rallied more than 3% since Nov. 9.

The Japanese yen , which gained immediately after a 6.9-magnitude earthquake hit off the northeastern coast of Japan late afternoon Eastern time on Monday, reversed gains and fell further against the dollar by Tuesday.

The dollar was buying Yen111.06 late Tuesday in New York, compared with Yen110.84 late Monday in New York.

Immediately following the quake, and an ensuing tsunami warning, the market became "risk-averse," triggering yen-buying that eventually subsided, said Tohru Sasaki, head of FX research with J.P. Morgan in Tokyo.

But once it became clear the damage from the earthquake--which took place near the stricken Fukushima nuclear power plant--was limited, Asian stock markets rebounded and the dollar recovered. Any lasting impact from the earthquake on the foreign-exchange market is expected to be minimal, said Koji Fukaya, chief executive of FPG Securities in Tokyo.

The dollar's decline was likely also driven by Japanese exporters who had been waiting for an opportune moment to sell dollars, Fukaya said. Profit-taking on the dollar's recent gains emerged ahead of a public holiday Wednesday in Japan, and the U.S. Thanksgiving holiday on Thursday, he said.

"The dollar-yen rallied about 10% since the election due to a sharp rise in U.S. Treasury yields, that are highly correlated with the currency move," said Omer Esiner.

The 10-year Treasury yield rose nearly half a percent over the past two weeks to a 12-month high, resulting in a 2.3 percentage-point spread between Japanese bond yields and comparable Treasurys. When the spread widens, Japanese investors tend to sell their currency to buy dollars and U.S. Treasurys. Bond prices and yields move inversely.

Read:Here's when markets close on Black Friday (http://www.marketwatch.com/story/heres-when-markets-close-on-black-friday-2016-11-18)

On Tuesday, both the euro and the British pound fell against the dollar. The euro was trading at $1.0627 late Tuesday in New York versus $1.0631 late Monday. The British pound changed hands at $1.2417 late Tuesday in New York, compared with $1.2492 late Monday, a change of 0.6%.

European Central Bank President Mario Draghi said that the return of inflation toward the bank's objective still relies on the continuation of the current, unprecedented level of monetary support, despite the gradual closing of the output gap.

"These comments strengthen expectations for an extension of the bank's [quantitative easing] program beyond March 2017 at its next month gathering" and add to negative-euro sentiment, said Charalambos Pissouros, currency strategist at IronFX Global. Read the latest on European markets (http://www.marketwatch.com/story/brexit-boosted-rotork-and-miners-lead-european-markets-higher-2016-11-22).

(http://www.marketwatch.com/story/heres-when-markets-close-on-black-friday-2016-11-18)Meanwhile, U.S. President-elect Donald Trump outlined his plans for his first 100 days in office (http://www.marketwatch.com/story/donald-trump-vows-to-withdraw-from-tpp-on-day-one-2016-11-21), including formally declaring his intent to withdraw from the Trans-Pacific Partnership (TPP) trade deal and replace it with bilateral agreements.

"Even though this had no immediate market reaction, it eased [dollar] gains a bit, as it [tears up] any hopes for a softer protectionist stance on international trade," said Pissouros.

(END) Dow Jones Newswires

November 22, 2016 16:26 ET (21:26 GMT)

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