Dollar extends gains vs yen as traders await US jobs report

By Laura Matthews

NEW YORK (Reuters) -The dollar strengthened against the yen on Wednesday and the Japanese currency fell to a 10-month low, while Finance Minister Satsuki Katayama declared that Japan's new government was closely monitoring markets "with a high sense of urgency."

Japanese government ministers including Katayama met Bank of Japan Governor Kazuo Ueda on Wednesday. The yen fell after Katayama's comments.

The currency has been falling on market expectations that Prime Minister Sanae Takaichi's new administration will deliver a huge spending package backed by low interest rates.

"From a short-term point of view, the yen continues to underperform. It’s deviating quite significantly from underlying fundamentals," said Shaun Osborne, chief FX strategist, Scotiabank.

"It's certainly on the radar for Japanese officials. We may be moving into a range here where stronger protest from the Japanese government becomes a distinct risk here."

Meanwhile, the greenback also ticked up against most major peers after the Federal Reserve's October meeting minutes showed several members thought a December interest-rate cut "could be appropriate" but many viewed it as "likely not appropriate." Traders were looking to the minutes and the upcoming non-farm payrolls to provide clues about the potential for an interest-rate cut next month.

"The deck appears stacked against the doves," said Matt Weller, global head of market research at StoneX.

MARKET WEIGHS INTERVENTION RISKS FOR YEN

The yen fell 0.92% to 156.975, hitting its lowest against the dollar since mid-January in the New York afternoon session.

The inauguration last month of Takaichi, who is known as an advocate of expansionary fiscal and monetary policy, has complicated the BOJ's efforts to gradually push up still-low interest rates.

The Kyodo news agency reported that Japan's stimulus package could exceed 20 trillion yen ($129 billion) and be funded by an extra budget of around 17 trillion yen.

StoneX's Weller sees more weakness in store for the yen, telling Reuters the simultaneous rise in yields and fall in the currency signals "global investors are starting to lose confidence in that country's situation as a whole."

BOE EXPECTED TO CUT RATES IN DECEMBER

In Britain, consumer price inflation fell to 3.6% in October from September's joint 18-month high of 3.8%, official figures showed on Wednesday, as expected by the BoE and economists polled by Reuters.

The inflation data cemented expectations that the BoE could cut interest rates in December.

Sterling was down 0.71% against the dollar at 1.3050, briefly touching its lowest since Friday when British markets were whipped around as speculation swirled around the highly anticipated November 26 budget, which remains the key event for sterling this month.

The dollar index, which measures the greenback's strength against a basket of six currencies, rose 0.59% to 100.17. The euro fell 0.47% to $1.1526.

Fed funds futures are pricing an implied 33% probability of a 25-basis-point cut at the December 10 meeting, compared with a 42.4% chance a day earlier, according to the CME Group's FedWatch tool.

Another test will come with Thursday's delayed release of non-farm payrolls data for September, after initial jobless claims data released on Tuesday showed the number of Americans on jobless benefits surged between mid-September and mid-October.

Still, with news that the Bureau of Labor Statistics will not release the October and November payrolls reports until after the December FOMC meeting, Scotiabank's Osborne said: "I imagine that if we get a weak run of jobs data between now and the end of January, pressure for a more aggressive 'catch up' move could rise."

(Reporting by Laura Matthews in New York; Additional reporting by Joice Alves, Ozan Ergenay in London and Gregor Stuart Hunter in Singapore; Editing by Alex Richardson, Alexandra Hudson and Edmund Klamann)