The US dollar index strengthened to a one-month high against the Japanese yen on Monday as traders eyed another interest rate hike from the Federal Reserve, while the Bank of Japan stuck to easy policy for now.
The US dollar strengthened to 134.22 against the yen, the highest level since March 15. It was up 0.19% at 134 yen. Meanwhile, the US dollar index which measures the currency against six major currencies traded up 0.31% to a trading level of 101.560.
"The US dollar has returned to strength but we have reports that comments from the Bank of Japan suggest that there is no real reason for them to back away from their ultra-easy policy," said Jane Foley, head of FX strategy at Rabobank.
Expectations that interest rates will rise relative to global peers tend to boost a country's currency by making investments there look more attractive, and vice versa.
The new Bank of Japan governor Kazuo Ueda explained last week that the country will remain "dovish" by keeping interest rates very low for now.
Meanwhile, prices in the derivatives market showed traders thought there was about an 86% chance the Fed would raise rates again by 25 basis points in May, up from around 69% last week.
The increase came after last week's US retail sales figures were revised upwards, a Fed official said a rate hike had yet to have the desired effect, and consumer inflation expectations rose on Friday.
The euro was broadly unchanged against the dollar on Monday at $1.098. It hit a one-year high of $1.108 on Friday, with traders anticipating further interest rate hikes from the European Central Bank.
Sterling slipped 0.07% to $1.241, after hitting a 10-month high of $1.255 on Friday.
Beat Nussbaumer, a currency trader and portfolio manager, said he thinks the US dollar will weaken in the coming weeks but the probability is low.
Rabobank's Foley said investors will monitor comments from the Fed, with Austan Goolsbee, Christopher Waller, and Loretta Mester among US officials who will speak this week.
Foley expects another 25 basis point rate hike from the Fed in May before it keeps rates steady for the rest of the year. Investors will also be keeping an eye on bank earnings, with Bank of America and Goldman Sachs due to report on Tuesday.
