LONDON - A jump in U.S. Treasury yields pushed the dollar index to a six-day high on Tuesday, while Japan's yen fell after the Bank of Japan said it would stick to its ultra-loose monetary policy.
The U.S. Federal Reserve meets next week. It is expected to raise rates in March, for the first time since the start of the coronavirus pandemic, and investors are pricing in four rate hikes in 2022.
As investors braced for the possibility of the Fed being more hawkish than expected, U.S. Treasury yields jumped on Tuesday, with two-year yields (which track short-term rate expectations) crossing 1% for the first time since February, 2020.
The U.S. 10-year yield also hit a two-year high.
The U.S. dollar strengthened against a basket of currencies, hitting a six-day high of 95.454 during Asian trading, before easing gradually overnight. At 0836 GMT it was at 95.308, up 0.1% on the day.
Euro-dollar was down 0.1% at $1.1395.
The yen slipped after the Bank of Japan said it would maintain its ultra-loose monetary policy even as its global counterparts move towards exiting from crisis-mode policies.
At 0838 GMT, the dollar was up 0.1% against the yen at 114.72, with the pair having reached as high as 115.06 overnight.
"We continue to expect the BoJ to stick to their current policy framework until at least Governor Kuroda’s term ends next April," wrote MUFG currency analyst Lee Hardman in a note to clients.
"The widening divergence between BoJ and Fed policy expectations should continue to place upward pressure on USD/JPY," he wrote.
However, Hardman noted that the pair failed to pass the 117 level as it strengthened this month.
"That failure and the fact that the market was short JPY means the prospect of a quick rebound for USD/JPY is diminishing... some USD/JPY recovery is feasible but this correction could be a sign of the beginning of the end of the trend higher in USD/JPY," he said.
The Australian dollar fell, down 0.3% on the day at $0.7193. The New Zealand dollar was also down 0.3%.
Both currencies faced disappointing domestic data, with Australian consumers cowed by the rapid spread of coronavirus and record deaths.
The British pound was flat at $1.36405, supported by UK jobs data.
China's central bank said it would do more to support growth, while steadily lowering financing costs and keeping the yuan exchange rate stable, the bank's vice governor said.
The central bank unexpectedly cut the borrowing costs of its medium-term loans for the first time since April 2020, with market analysts expecting more policy easing this year to cushion an economic slowdown.
The yuan hit its highest in more than three years, helped by trade settlement inflows. But the yuan's advantage from having a higher yield is dwindling: the spread between Chinese and U.S. 10-year Treasury yields has shrunk to its narrowest since May 2019.
Elsewhere, bitcoin was little changed around $41,850, still significantly below the all-time high of $69,000 it hit last November.
(Reporting by Elizabeth Howcroft, editing by Ed Osmond) ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))