Dollar eyes new August highs vs yen, looks to Fed for next leg up

Aug 10 (Reuters) – USD/JPY rallied on Wednesday to the 50-day moving average by 135.40 ahead of August’s 135.585 high on surging Treasury-JGB yields spreads before digesting mixed US retail sales data, leaving the upcoming Fed meeting minutes key to underpin a drive toward July’s 24-year peak at 139.38.

The market marginally favors the Fed raising rates by 75bp for a third straight meeting in September, and the peak in Fed funds has risen to 3.75% in March. The BOJ, despite inflation running above its 2% target, isn’t seen hiking, allowing 2-year Treasury-JGB yield spreads to surge 10bp toward June’s 3.435% peak.

Treasury yields rallied in sympathy with a 25bp spike in gilt yields on double-digit UK inflation. But the surge in yields across most major government bond markets — except JGBs — is also testing recent risk-on flows into stocks.

For USD/JPY a close above the 50-DMA and August highs at 135.40/585 would put resistance by 136 in play, followed by Fibo hurdles in the 137.30-37 range.

The sharp rise away from Wednesday’s 133.91 low and 200-HMA there was quite bullish.

(Randolph Donney is a Reuters market analyst. The views expressed are his own.)