By Gertrude Chavez-Dreyfuss and Alden Bentley
NEW YORK (Reuters) -The U.S. dollar hit a fresh 34-year high against the yen in subdued trade on Monday, with market participants taking their cue from the Federal Reserve's higher-for-longer interest rate stance, even as they remained alert to any signs of intervention by Japanese authorities to prop up the struggling yen.
The dollar hit a fresh 34-year high of 154.85 yen versus the Japanese currency and was last up 0.1% at 154.81 yen, a whisker away from the 155-level that is next on traders' radars for possible intervention.
The yen hit its fresh lows ahead of the Bank of Japan's (BOJ) policy review on Friday.
Market players have been largely aware that Japan has refrained from intervening in the market despite the yen hitting several 34-year lows this year.
"I think that the MOF (Ministry of Finance) has acknowledged that the currency fundamentals have been moving in the wrong direction, i.e. dollar yen has been going higher because U.S. yields have been going so much higher," said Calvin Tse, managing director and head of Americas macro strategy at BNP Paribas (EPA:BNPP) in New York.
"I think they've been very wary to stand in the way of that. However, if we see an environment where let's say U.S. yields start to weaken ... then that provides them at least in their (MOF) minds with a window of opportunity to act. So long story short, I don't think they will be intervening if the ... driver of dollar yen higher is higher U.S. yields," he added.
In early afternoon trading, the dollar index, a gauge of the greenback's value against six major currencies, was flat to slightly higher at 106.16. It was off five-month highs hit last week after comments from Federal Reserve officials and a run of hotter-than-expected inflation data forced a paring back of U.S. rate-cut expectations.
A cooling in Middle East tensions, which had driven the dollar, gold and oil sharply higher on Friday and battered stock markets, also helped temper volatility. Tehran downplayed Israel's retaliatory drone strike, in what appeared to be a move aimed at averting regional escalation.
"The fact that the equities are up a little bit today as tensions ease a bit is what we're focused on," said John Doyle, vice president of trading and dealing at Monex USA in Washington. "We're expecting a fairly easy day as we kind of put that in the rearview mirror and look toward the earnings season."
Last week, Deutsche Bank (ETR:DBKGn)'s index of currency volatility hit 7.18, the highest level since February. On a weekly basis, the volatility index rose 9.7%, its biggest weekly gain since June 2023.
WEAKER EURO
Besides the BOJ meeting, investors are looking to U.S. corporate earnings due from megacaps like Tesla (NASDAQ:TSLA) on Tuesday, Meta on Wednesday and Microsoft (NASDAQ:MSFT), and Alphabet (NASDAQ:GOOGL) on Thursday.
The market will also get U.S. first-quarter gross domestic product data on Thursday and the inflation metric the Fed targets, the personal consumption price expenditures (PCE) index, on Friday.
The issue of the strong dollar prevailed at last week's International Monetary Fund and World Bank spring meetings in Washington too, and the U.S., Japan and South Korea released a rare joint statement on the issue.
Speaking after the Group of 20 (G20) finance leaders' meeting in Washington, BOJ Governor Kazuo Ueda said the Japanese central bank may raise interest rates again if the yen's declines significantly push up inflation, highlighting the dilemma the weak currency has become for policymakers.
A rethink on Fed policy easing has led to a general repricing of global rate-cut timelines, but expectations for the European Central Bank (ECB) and the Bank of England (BoE) to start cutting by the middle of this year are still intact.
The euro, which is heading for its biggest monthly drop against the dollar since January, was little changed at $1.0653, while sterling slipped 0.1% to $1.2353.
Analysts do not see too much room for U.S. Treasury yields to rise further, given the light economic data calendar for the rest of the month and how far they have already risen as investors reprice Fed rate expectations.
Bitcoin was last up 4.1% at $66,687. The world's largest cryptocurrency completed its "halving" at the weekend, a phenomenon that happens roughly every four years and aims to reduce the rate at which bitcoins are created.