US dollar hits 10-month high vs yen as oil spurs reflation bets

[LONDON] The US dollar rose to its highest since February against the yen on Monday as US bond yields climbed on the back of expectations of broadly higher inflation, driven by a five per cent rise in global oil prices.

The Norwegian crown and Canadian dollar were the other big gainers after Opec and non-Opec producers struck their first deal since 2001 to curtail output jointly, driving crude prices to their highest levels in a year and a half.

Added to gains for the euro and sterling that held the US dollar flat against the basket of currencies used to measure its broader strength and traders said the market was cautious ahead of the US Federal Reserve's meeting on Wednesday.

With a rise in interest rates fully priced in this week, the question is what sort of signal Fed chair Janet Yellen sends on the pace of more tightening next year and whether its board is nervous enough about the US dollar's strength to mention it.

"It's going to be hard to have the energy to make new lows before the Fed," said Richard Benson, co-head of portfolio investment at currency fund Millennium Global in London.

"An explicit mention of the currency in either the statement or the news conference and it might become more difficult for the dollar."

The US dollar rose half a percent to trade above 116 yen for the first time since early February. It lost 0.4 per cent against its Canadian equivalent and was 0.1 per cent lower against the euro at US$1.5760.

Speculators increased positive bets on the greenback for a third straight week through Dec 6, pushing net longs to their highest since early January, according to Reuters calculations and data from the Commodity Futures Trading Commission released on Friday.

But there are nerves around.

President-elect Donald Trump's comments at the weekend spurred concerns about whether he is on course for a conflict with China that could cramp global trade and cool investors' appetite for risk.

That would tend to benefit traditional safe havens for capital like Japan but for now are secondary to the growing yield differential between US and Japanese interest rates.

"The big challenges for the dollar against the yen are the speed of the move, and the risk of position-squaring once the last big policy event of the year is out of the way on Wednesday," Societe Generale strategist Kit Juckes said.

"But as long as yield divergence doesn't drive risk appetite into depression, there's further to go in this move."

REUTERS