Dollar pushes towards fresh 24-year peak versus yen after U.S. CPI shock

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By Kevin Buckland

TOKYO (Reuters) - The dollar climbed close to a 24-year peak against the yen on Wednesday amid a jump in U.S. yields after hotter-than-expected inflation boosted bets for even more aggressive monetary tightening by the Federal Reserve next week.

The dollar rose as high as 144.965 yen in the Asian session, taking it close to last Wednesday's high of 144.99, a level not seen since August 1998, before last trading little changed at 144.56.

Overnight, the currency pair, which is extremely sensitive to rate differentials, surged 1.26% as 10-year Treasury yields climbed to a three-month high following an unexpected rise in the U.S. consumer price index (CPI) for August.

"This has really shattered the illusion ... that inflation had peaked and was coming down," Ray Attrill, head of currency strategy at National Australia Bank (OTC:NABZY), said in a podcast. "Hence markets have decided that next week's Fed decision is not between 50 and 75 (basis point increase), it's now between 75 and 100."

Money markets currently price 37% odds for a full percentage-point hike on Sept. 21, versus a 63% probability of another 75 basis point move.

Nomura's economists also said they now believe a 100 basis-point rate hike is the most likely outcome.

"Markets underappreciate just how entrenched U.S. inflation has become and the magnitude of response that will likely be required from the Fed to dislodge it," they wrote in a note.

The dollar index, which measures the currency against six major peers including the yen, euro and sterling, was little changed at 109.750, after surging 1.44% overnight, its biggest one-day percentage gain since March 2020.

The euro edged up 0.11% to $0.9981, clawing back a little of Tuesday's 1.52% tumble. Sterling rose 0.17% to $1.151, but after a 1.61% plunge overnight.

"The dollar is screaming overvaluation, but in order to see that as correct, you're going to need some sort of catalyst for a cyclical downturn in the dollar, and these latest developments have challenged that," NAB's Attrill said.

The risk-sensitive Aussie dollar rose 0.25% to $0.6750, although that jump paled in comparison with its precipitous 2.26% slide overnight.

Leading cryptocurrency bitcoin lost another 0.21% to $20,191.00, following a 9.93% decline on Tuesday.