TOKYO (Reuters) - The U.S. dollar marched to a two-month high versus the yen on Monday and carved out fresh ground against other major currencies after stronger-than-expected underlying U.S. inflation supported the Federal Reserve's case for a rate hike later this year.
The U.S. currency traded near a two-month high of 121.78 yen after jumping from a low of 120.64 on Friday, helped by a rise in U.S. Treasury yields triggered by the CPI data.
A move above 122.04 would take the greenback to an eight-year peak against the yen.
"Whether the dollar can breach the 122.04 yen threshold depends on upcoming U.S. data. While a June rate hike is no longer a likelihood, upbeat indicators that would back up Friday's CPI numbers will fan hopes that the Fed will provide hints at the June meeting on when it might hike rates," said Junichi Ishikawa, market analyst at IG Securities in Tokyo.
Data on Friday showed core U.S. CPI increased 0.3 percent in April amid rising shelter and medical care costs. It was the largest rise in the core CPI since January 2013 and followed a 0.2 per cent gain in March.
The euro was down 0.2 per cent at US$1.0994, having touched a one-month low of US$1.0964 earlier in the session.
The common currency reached a three-month peak of US$1.1468 as recently as May 15, along with a surge in euro zone bond yields and lessened pessimism towards the European economy.
But it has since sank on factors including prospects of more easing by the European Central Bank, persisting Greek debt woes and revived demand for the dollar.
The U.S. economy's recovery has not been as robust as expected, dashing prospects held by the markets earlier in the year for the Fed to raise rates in June and prompting investors to push back their expectations to September or later.
Nevertheless, bits and pieces of upbeat data released this month have shown that the U.S. economy still stands a head above those of other developed economies such as the euro zone and Japan, still deeply committed to easy monetary policies.
"The flow is shifting back in favour of the dollar, hurt recently by spotty economic data and receding likelihood of an early rate hike. Comments by policymakers has also helped," said Koji Fukaya, president of FPG Securities in Tokyo.
"A June hike had gone out the window with sentiment for tightening in September and even later receding at one point, but such pessimism has ebbed," he said.
Federal Reserve Chair Janet Yellen on Friday said she expected the central bank to raise rates this year as the U.S. economy was on course to bounce back from a sluggish first quarter and as headwinds at home and abroad begin to wane.
Amid reminders that the Fed is still most likely to raise rates ahead of its G7 peers, the dollar index against a basket of other major currencies hovered close to a one-month high of 96.446.
The pound was little changed at US$1.5480 after shedding more than one per cent overnight against the bullish dollar. The Australian dollar, which also suffered big losses overnight, traded near a three-week low of $0.7804.
Trading is expected to be subdued, if not choppy, through the rest of the session with London, Frankfurt and New York markets closed for holidays.