TOKYO Reuters -- The dollar was up on Thursday as expectations for aggressive Federal Reserve monetary tightening, but was well off the previous day's peak amid nervousness about what a gathering of finance ministers might say about its rapid appreciation.
The dollar added 0.36% to 128.335 yen after soaring to a two-decade high of 129.430 on Wednesday, as the Bank of Japan BOJ stepped into the bond market for the third time in three months to defend its zero-percent yield target, a stark contrast to the Fed's increasingly hawkish posture.
The dollar index - which measures the currency against six peers, including the yen - went up 0.11% to 100.45, following its retreat from a two-year peak of 101.03.
The dollar was easing overnight and the benchmark Treasury yields fell from the highest level since December 2018 to close to 3%, as dip buyers emerged. The yields were higher in Tokyo trading on Thursday. Westpac strategists wrote in a client note that the US few central banks will match the Fed this year in policy hikes and balance sheet retrenchment.
They said that the dollar index should remain bid in this environment, with talk of 101 -- 102 likely to increase in the near term.
San Francisco Fed President Mary Daly said on Wednesday she believed the case for a half-percentage rate hike next month is complete and solid, adding to comments from other Fed officials backing bigger rate increases.
Markets are currently priced for half-point increases in May and June.
The BOJ on Wednesday offered to buy unlimited 10 year Japanese government bonds for four consecutive sessions, as yields went up against the 0.25% maximum leeway around its zero-percent target, showing its commitment to ultra-easing stimulus settings ahead of its policy meeting next week.
Governor Haruhiko Kuroda believes that a weak yen is good for the economy, but admitted earlier this week that moves had been quite sharp and could hurt Japanese companies' business plans.
Finance Minister Shunichi Suzuki has been more categorical, saying on Tuesday that the damage to the economy from a weakening yen is greater than the benefits, in his strongest statement yet.
He is due to meet U.S. Treasury Secretary Janet Yellen on the sidelines of the Group of 20 financial leaders gathering in Washington D.C., prompting traders to pare back bearish bets on the possibility of stronger rhetoric on the currency.
In a research note, Adam Cole, chief currency strategist at RBC Capital Markets, said Japanese policy makers have not fully utilised their verbal intervention toolkits yet, and that the next phase would typically involve describing moves as speculative and threatening to take decisive action.
If we get to that point, the hurdle for physical intervention may be lower than generally perceived. If intervention would work, he said it could restore short-term balance to markets and manage the pace of JPY depreciation, but there is no chance that the BOJ would mopping up all of the JPY selling we anticipate from Japan as the Fed hiking cycle gets underway. The euro fell 0.11% to $1.08425, while sterling fell 0.14% to $1.30555.
The New Zealand dollar sank by 0.40% to $0.67755, hurt by softer-than-expected consumer price data.