Dollar hits 2-1/2-year high against yen as Fed tapering seen on track

© Reuters. FILE PHOTO: A U.S. dollar banknote is seen in this illustration taken May 26, 2020. REUTERS/Dado Ruvic/Illustration/File Photo

By Hideyuki Sano

TOKYO (Reuters) - The dollar ticked up to a 2-1/2-year high versus the yen on Monday after a soft U.S. payrolls figure did little to alter market expectations that the U.S. Federal Reserve will announce it will start tapering its massive bond-buying next month.

The U.S. economy created the fewest jobs in nine months in September, with nonfarm payrolls increasing 194,000, way below economists' forecast of 500,000.

Still, data for August was revised up sharply while the jobless rate dropped to an 18-month low of 4.8% due to people leaving the labour force. Average hourly earnings also increased 0.6% from 0.4% in August.

All told, the spectre of labour shortage firmly remains in place, keeping worries about inflation alive and giving the Federal Reserve justification to go ahead with reducing its stimulus it started last year for pandemic relief.

U.S. bond yields rose on the data, with the benchmark 10-year Treasuries yield hitting a four-month high of 1.617%, boosting the dollar's yield attraction.

The yen, known to be most sensitive to yield differentials, reacted by slipping to as low as 112.32 yen per dollar, a level last seen in April 2019.

"Although the headline payroll figure was weak, when you look into details, the outlook remains solid and there isn't anything that would prevent the Fed from tapering next month," said Shinichiro Kadota, senior FX strategist at Barclays (LON:BARC).

"The dollar/yen is now at the top end of its trading range, its 2019 peak of 112.40, so I do expect heavy selling there for now. Still, should it break that level, we could see the dollar rising to 113 or 114 handle quite easily," he added.

The euro was soft at $1.1575, hovering a tad above its Wednesday's low of $1.1529, its weakest level since July last year.

The dollar's index stood at 94.09, not far from its one-year high of 94.504 touched earlier this month.

The U.S. currency could gain further if U.S. consumer price data due on Wednesday shows an upswing in inflation and boost expectations of an earlier rate hike next year after tapering, analysts said.

On the other hand, with supply disruptions and rising commodity prices affecting many other countries, concerns about inflation is not limited to the United States.

The British pound held firmer at $1.3623, extending its recovery from a nine-month low set late last month, on growing expectations that the Bank of England could raise interest rates to curb soaring inflation.

The Canadian dollar changed hands at C$1.2473 per U.S. dollar, having hit a two-month high of C$1.24525 on Friday thanks to surprisingly strong Canadian payrolls data and lofty oil prices.

Elsewhere, the offshore Chinese yuan changed hands at 6.4438 per dollar, its Oct. 1 high of 6.4286.

In cryptos, bitcoin was firm at $54,782 having hit a five-month high of $56,561 on Sunday while ether is softer at $3,456.