Yen slumps as rising energy prices, U.S. yields bite

© Reuters. FILE PHOTO: Banknotes of Euro, Hong Kong dollar, U.S. dollar, Japanese yen, GB pound and Chinese 100 yuan are seen in this picture illustration, in Beijing, China, January 21, 2016. REUTERS/Jason Lee/File Photo

By Alun John

HONG KONG (Reuters) - The yen hit a fresh three-year low on Tuesday, extending a sharp slide as traders wagered surging energy prices would drive Japan's demand for dollars and as they doubled down on expectations U.S. rates will rise well ahead of its peers.

The yen, nursing losses after its worst session against the dollar in five months, edged another 0.1% lower to 113.48 per dollar in early Asia trade, its weakest since December 2018, having shed 1% on Monday.

The Japanese currency's woes helped the dollar stay firm against a basket of major peers, even though the Aussie dollar has been gaining on surging energy prices and a bounce in iron ore.

The dollar index, which measures the greenback against a basket of peers, was at 94.4, not far from its one-year high of 94.504 touched at the end of September.

"What we're seeing in currency markets is a combination of the outlook for the Federal Reserve - largely markets are expecting a tapering announcement in November - and what is happening with commodities with a pretty broad rally at the moment," said Kim Mundy, currency strategist and senior economist at Commonwealth Bank of Australia (OTC:CMWAY).

She said these factors were affecting the yen, because Japan is a net energy importer "and so spiking energy prices are effectively a tax on consumption" and because it "reiterates the fact that Bank of Japan will probably be one of the last major central banks to even consider reducing ultra accommodative monetary policy."

Japan's wholesale prices surged 6.3% in September from a year earlier as raw material costs continued to rise, data published Tuesday showed.

The yen is also sensitive to rising U.S. yields, since rates at home are anchored near zero. Benchmark 10-year Treasury yields extended gains on Tuesday and, at 1.6136%, are their highest since June and up 30 bps in three weeks.

On Monday, U.S. crude touched $82.18 a barrel, its highest since late 2014, and Brent crude hit a three year high. [O/R]

With other commodity prices also robust the Aussie dollar stayed firm at $0.7342, a day after hitting a month high.

The inflationary impact of rising energy prices has solidified the case for the U.S. Federal Reserve to announce a tapering of its massive bond buying programme in November, raising the possibility of interest rate hikes in late 2022, even though jobs data published last Friday missed expectations.

Price concerns are also on the minds of policy makers at other central banks, with the Bank of England hinting it will raise interest rates to curb inflation, supporting sterling even as the British economy grapples with high energy costs.

The pound rose to a two-week high of $1.3673 on Monday before easing back slightly to last change hands at$1.3586.

The euro however stayed pinned near its lowest levels in a year, fetching $1.1550. The South Korean won fell to 1,200 per dollar for the first time in 14 months after the Bank of Korea kept interest rates steady, taking a breather after hiking in August.

In cryptocurrencies, bitcoin edged off a five month high, falling around 1% in Asian trading to $56,800. Ether, the world's second biggest cryptocurrency dropped 1.54% to $3,489.