Kevin Buckland

TOKYO, Reuters – Monday’s dollar trade was close to a 2-1/2-week high against major peers. This is because of the Federal Reserve’s earlier interest rate increases and the faster inflation in the United States.

The yen was at a 1-1/2-week peak after the safe-haven Japanese currency declined as strong results for the ruling party’s weekend election reduced political uncertainty.

The was, which compares the greenback to six competitors, was unchanged at 94.166. It hovered close Friday’s high of 94.302 on Friday, an unprecedented level since Oct. 13.

US currency gained 0.13% last week when it bought 114.175yen. A price above 114.41 will be the highest since Oct. 20, when the currency reached an all-time high of 114.695.

Fumio Kishida is the Japanese new prime minister. His ruling Liberal Democratic Party held a strong majority at Sunday’s parliament election. He has now solidified his position within a volatile party, and can increase his stimulus.

Shinichiro Kadota (senior FX strategist), stated that “the reduction in political uncertainty has playing out with slight weakness this morning.” Barclays Tokyo (LON)

The Fed is the biggest driver for dollar-yen direction in the future.

This week is a busy one for the United States, as the Federal Open Market Committee (FOC) widely expects to announce a reduction in stimulus.

The market expects that rates will rise in the middle of next fiscal year, as evidenced by a 4.4% increase in government’s core personal consumption expenses index (the Fed’s preferred inflation measure).

The data showed that futures on Fed funds Rate (which track short-term expectations of rate trends) priced in a 90% probability of tightening to quarter points by June 2022. This also includes a December rate hike.

Also Tuesday is the policy decision day for Australia’s Reserve Bank. The markets challenge central bank claims that rates won’t go up until 2024.

Inflation continued to fall by 0.4% at $0.7509, extending its decline from the nearly 4-month-high $0.75555 that was reached last week.

On Thursday, the Bank of England will announce its policy decision. Markets are weighing the possibility that the central bank might raise interest rates.

Sterling fell to $1.36775 and then dropped to $1.3663 earlier, for the first time since October.

Meanwhile, the euro was almost flat at $1.15575. This is close to Friday’s low of $1.1535 which has been the weakest since October 13.