Dollar Gains Support from Rising US Yields and Yen Weakness

SINGAPORE (Reuters) - The Japanese yen traded around five-month lows on Monday against a dollar underpinned by rising U.S. yields as thin year-end liquidity kept most currencies in tight ranges.

The yen was changing hands at 157.71 with only the risk of Japanese intervention preventing another test of the 160 level last seen in July.

The dollar index measure against major rivals was flat at 107.98.

The euro stood at $1.0429, not far from recent troughs and in a holding pattern in holiday trading. The currency is heading for a calendar-year drop of roughly 5.5% on the dollar.

Rising U.S. Treasury yields have been a tailwind for the dollar, with the benchmark 10-year note hitting a more than seven-month high last week. The yield hovered close to that mark on Monday, at 4.625%.

"Despite paid forecasters almost universally calling for a weaker U.S. dollar in 2024, the greenback looks set to close the year higher against all major currencies with the buck reigning supreme," said Chris Weston, head of research at Australian online broker Pepperstone.

For the month, the dollar index is up 2.3%, bringing year-to-date gains to 6.6%.

It has gained in each of the last three months, helped by expectations President-elect Donald Trump's policies of looser regulation, tax cuts, tariff hikes and tighter immigration will be both pro-growth and inflationary and keep U.S. yields elevated.

The dollar has gained 10 yen since Dec. 3, with much of the decline in the Japanese currency coming after the Federal Reserve's Dec. 18 message of caution around future rate cuts.

That view has weighed heavily on the yen, which hit its weakest level since July 17 last week at 158.09 per dollar and has shed 10.6% so far this year.

It came off those lows on Friday after a summary of opinions from the Bank of Japan’s December policy meeting showed some policymakers gaining confidence in an imminent rate increase, while the Japanese central bank also cut its monthly bond purchases.

Still, Japanese yields remain notably low, and recent comments have sown doubts about the BOJ's commitment to lift rates. The BOJ held interest rates steady at 0.25% at this month's meeting, and governor Kazuo Ueda said the central bank was scrutinizing more data on next year's wage momentum and clarity on the incoming U.S. administration's economic policies.

A Reuters poll taken earlier this month showed the BOJ could raise rates to 0.50% by end-March, and interest rates markets are pricing in only a 42% chance of a rate rise in January.

Pepperstone's Weston said dollar buyers continued to dominate trading in the dollar-yen pair.

Traders are on watch for any potential intervention by Japanese officials to shore up the currency if it continues to weaken, as they have done multiple times this year.

Japan Finance Minister Katsunobu Kato on Friday reiterated concerns over a sliding yen, repeating his warning to take action against excessive currency moves.

"It rarely sits well buying into any market pushing new run highs, but in my view, any upside break of 158.00 is good for chasing - although yen shorts do run the increasing risk of credible MOF yen jawboning and possible intervention," Weston wrote in a note to clients.

Barring the yen, currency moves in major markets were tepid last week. The yen fell 0.9%, the euro shed 0.2% and sterling rose 0.1% while the dollar index climbed 0.2%.

The next interest rate cut by the European Central Bank could be longer in coming after a recent uptick in inflation, ECB Governing Council member Robert Holzmann was quoted as saying on Saturday.

Leading cryptocurrency bitcoin too was sluggish around $93,350, and is down about 4% on the month after retreating from a record high of 108,379.28 hit on Dec. 17. It has surged about 115% so far this year.

(Editing by Shri Navaratnam)