LONDON/SINGAPORE: The dollar held firm against the euro on Monday, with traders taking the view the U.S. Federal Reserve will likely lift its benchmark rate above 5% and keep it there to squeeze inflation after data showed the labour market remains strong.
An earthquake in central Turkey and northwest Syria and a strong U.S. dollar added pressure on emerging currencies sending Turkey's lira to a record low of 18.85 against the dollar.
The Fed on Wednesday raised rates by 25 basis points and said it had turned a corner in the fight against inflation, leading investors to price in a slowdown in the pace of rate hikes going forward.
But an eye-popping U.S. nonfarm payrolls number on Friday along with a services industry rebound in January sent the dollar to a mid-January high, with investors pricing in the Fed's policy rate to peak at 5.05% in June.
Against a basket of currencies, the dollar index touched a three-week high on Monday of 103.25 and was not far from that at 0926 GMT, up 0.1% at 103.23. The index had gained 1.1% on Friday.
"The worry of course is that the much better-than-expected data is bad news if the Fed sees this as bolstering its case of two more hikes and keeping rates elevated for longer," said Tapas Strickland, head of market economics at National Australia Bank.
Also boosting the safe-haven dollar was escalating tension between the United States and China after a U.S. military fighter jet shot down a suspected Chinese spy balloon off the coast of South Carolina on Saturday.
The euro slipped 0.2% to touch a nearly three-week lows of $1.0769. The single currency had surged to a 10-month high on Thursday after the European Central Bank lifted its deposit rate to 2.5% and promised a 50 basis point rate hike in March.
On Monday, Austrian central bank chief Robert Holzmann said the risk of the ECB not raising interest rates high enough was still bigger than that of lifting them too much as inflation in the euro area remained far too high.
The yen weakened after the Nikkei newspaper reported, citing anonymous government and ruling party sources, that Bank of Japan Deputy Governor Masayoshi Amamiya was being sounded out to be the next governor.
In a news conference on Monday, Deputy Chief Cabinet Secretary Yoshihiko Isozaki said there was no truth to the Nikkei report.
The yen was 0.5% weaker at 131.90 per dollar, having touched three-week lows of 132.60 earlier in the session.
"Amamiya has helped Kuroda since 2013 on monetary policies, and is considered the most dovish among the contenders, which is thrashing hopes that BOJ policy normalisation could progress under the new chief," Saxo Markets strategists said.
The BOJ's loose policy settings have drawn increasing criticism from many quarters, including opposition politicians and traders, for distorting market function.
(Reporting by Joice Alves in London and Ankur Banerjee in Singapore; Editing by Jacqueline Wong)