By Chuck Mikolajczak

NEW YORK(Reuters) – The U.S. dollar rose against a basket of major currencies on Monday, the first trading day of the new year, tracking government bond yields as investors anticipate the Federal Reserve will stay on its path of interest rate hikes in 2022.

While the surge in coronavirus cases caused by the Omicron variant continued to impact global travel and public services, hopes ran high that lockdowns would be averted.

On Monday, the U.S. Food and Drug Administration authorized the use of a third dose of the Pfizer and BioNTech COVID-19 vaccine for children aged between 12 and 15 years, and narrowed the time for all booster shots to 5 months from 6 months after primary doses.

Yields on U.S. two-year notes, which are sensitive to rate hike expectations, along with 5-year notes, soared to their highest level since March 2020. Benchmark U.S. 10-year and 5-year yields rose to six-week peaks. The U.S. central bank is seen as likely to begin hiking interest rates by mid-2022.

Stocks on Wall Street were modestly higher, but had pulled back from earlier gains.

“You’ve seen this spike in yields, a drop in the S&P and that is kind of like a double whammy – you get the yield play and a little bit of a risk-off combination,” said Erik Bregar, president and CEO at Bregar Capital Corp in Toronto.

“Right now yields are the driver.”

The dollar index rose 0.615%, with the euro down 0.63% to $1.1296.

Economic data showed a gauge of manufacturing for December by Markit dipped to 57.7 from its prior reading of 57.8, but still indicating expansion. November construction spending rose 0.4%, shy of expectations calling for a rise of 0.6%.

The Japanese yen weakened 0.21% versus the greenback at 115.30 per dollar, while Sterling was last trading at $1.3437, down 0.68% on the day.

Trading volumes, however, were expected to be thin as London, Europe’s main FX trading center, is closed for a market holiday.

In the broader euro zone, manufacturing activity remained resilient as factories took advantage of an easing in supply chain constraints and stocked up on raw materials at a record pace.

Turkey’s annual inflation rate surged to 36.1% last month, its highest in the 19 years Tayyip Erdogan has ruled, laying bare the extent of a currency crisis caused by the president’s unorthodox interest rate-cutting policies.

The lira was trading at 13.02 against the dollar after the data, 1.2% weaker on the day, but off an early low of 13.92.

Bitcoin fell 0.98% to $46,885.99.

(Reporting by Julien Ponthus and Sujata Rao in London; Editing by Alexander Smith)