Yen tumbles to 24-year low, U.S. rate hike bets boost dollar

© Reuters. FILE PHOTO: Japanese yen and U.S. dollar banknotes are seen with a currency exchange rate graph in this illustration picture taken June 16, 2022. REUTERS/Florence Lo/Illustration

By Rae Wee and Kevin Buckland

SINGAPORE/TOKYO (Reuters) - The dollar climbed to a 24-year peak against the Japanese yen on Thursday, as investors braced for higher U.S. interest rates while Japanese rates remain firmly pinned down.

In Asia trade, the greenback hit a high of 139.69 yen, its highest since 1998, after gaining about 0.5% on the previous day's close. It was last up 0.17% at 139.2 yen.

"The main driver remains rate differentials between Japan and the U.S., and even today's price action just follows the overnight move higher in U.S. rates. We think the path ahead is going to depend on how U.S. rates behave," said Sosuke Nakamura, a strategist at JPMorgan (NYSE:JPM) in Tokyo.

Expectations for a 75-basis-point U.S. rate hike at next month's Federal Reserve meeting are rising on the back of solid economic data, with Fed funds futures last pointing to around a 75% chance of such an increase.

This helped push the yield on benchmark 10 year U.S. Treasuries to a two month high of 3.219% early on Tuesday. Japan's policy of yield curve control means its 10 year government bond yield is just 0.24%.

A senior finance ministry official said on Thursday that Japan was watching currency moves with a "high sense of urgency".

The surging dollar also pinned other major currencies down.

The euro fell 0.3% to just hold above parity at $1.00235, while the risk-sensitive Australian and New Zealand dollars hit their lowest levels since July.

They later pared losses, leaving the Aussie down 0.18% at $0.6831, and the kiwi down 0.24% at $0.6105.

Sterling was 0.16% lower at $1.16015, having recovered a little from a new 2-1/2 year low of $1.1570 hit early in the session. The pound lost 4.6% in August, its steepest monthly decline since October 2016.

"The high inflation and (the) gas supply are still major issues in both the euro zone and the UK, and I think it's going to keep downward pressure on both those currencies," said Joseph Capurso, head of international economics at Commonwealth Bank of Australia (OTC:CMWAY).

"I can see the euro going back below parity again quite soon.

Euro zone inflation rose to a record high at 9.1% in August, data released on Wednesday showed, solidifying the case for further big European Central Bank rate hikes to tame it.

The U.S. dollar index, which measures the greenback against a basket of currencies, was up 0.18% at 108.93, not far off its two-decade high of 109.48 hit on Monday.