The dollar rose sharply in early European trading on Monday, especially against the Japanese yen, as hot U.S. inflation data lifted Treasury yields at the start of a busy week for central banks.

At 02:50 a.m. ET (06:50 GMT), the dollar index, which tracks its exchange rate against a basket of 6 other currencies, was trading 0.4% higher at 104.430, rising to its highest level in 4 weeks.

The dollar’s strength was most evident against the Japanese yen, with USD/JPY rising 0.3% to 134.79, having earlier climbed to 135.16, its highest level since October 1998.

The data followed Friday’s U.S. consumer price index for May, which rose to a new 4-decade high of 8.6% year-on-year, raising the odds that the Federal Reserve will have to extend its series of 50 basis point rate hikes in the third quarter and even potentially make a larger 75 basis point hike possible at Wednesday’s monetary policy meeting.

The yield on benchmark 10-year U.S. bonds hit 3.2% on Monday morning, having risen nearly 12 basis points last Friday, while the Bank of Japan confirmed on Monday that it will buy Japanese government bonds on Tuesday as part of its policy to keep the benchmark 10-year bond yield near its 0% target.

The BOJ will meet on Friday, and its decision to buy government bonds on Tuesday suggests it is likely to stick to its ultra-easy monetary policy.

“A phrase that is beginning to be more widely used in the central banking community is the need for ‘stronger’ monetary tightening to fight inflation,” ING analysts said in a note. – Central banks raising real interest rates will be a constant hurdle for risky assets and pro-cyclical currencies (especially energy importers). This environment is favorable for the dollar.”

EUR/USD fell 0.3% to 1.0486, continuing the weakening the euro experienced after Thursday’s European Central Bank meeting, when the bank confirmed it would end its long-term bond buying scheme early next month and begin raising interest rates in July.

“The weakness was that peripheral bond markets remain exposed in the absence of news on anti-fragmentation support packages,” ING added. – But it is also felt that, like pro-cyclical currencies, the euro may not appreciate a rate hike as economic growth forecasts are downgraded.”

GBP/USD fell 0.4% to 1.2263; with the pound receiving little support due to expectations that the Bank of England will raise rates again on Thursday after the UK economy slowed once again in April as industrial and manufacturing output fell for the second consecutive month.

The country’s GDP fell 0.3% in April, much weaker than the 0.1% growth expected, while it grew just 0.2% in the 3 months to April after growing 0.8% in the previous 3-month period.

Risk-sensitive AUD/USD fell 0.4% to 0.7025 while USD/CNY rose 0.4% to 6.7346 after Beijing announced on Sunday 3 rounds of mass testing amid new COVID-19 outbreaks.
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