TOKYO, January 21, Reuters -- The safe-haven yen gained against the riskier Australian dollar on Friday as risk sentiment soured amid the resurgence of fears of heated inflation and aggressive Federal Reserve policy tightening.
The dollar took a breather from recent gains as the US Treasury yields stalled, but was headed for its best week in two months against a basket of major peers.
The Aussie - often considered a liquid proxy for risk appetite - fell by 0.57% to 82.02 yen, its weakest level in a month, and was last down 0.32% at $0.72035 overnight. Wall Street suffered a sell off in the final hours of trading, while Treasury yields fell from multi-year highs. The S&P 500 futures point to a further 0.5% retreat at the reopening.
Market expectations that the U.S. Federal Reserve will tighten monetary policy at a faster pace than anticipated has driven the advance in U.S. yields. The Fed funds futures are fully priced in a March increase and a total of four in 2022.
The Federal Open Market Committee FOMC will hold a two-day policy meeting on Tuesday, at the end of which market participants will closely read the committee's statement regarding the tightening timeline.
The dollar index, which measures the currency against six rivals, was 0.03% higher at 95.795 after touching a more than one week high of 95.864 on Thursday. It is up 0.65% for the week, rebounding from last week's 0.61% slide.
The euro fell 0.06% to $1.1303, matching Thursday's low, which was its lowest level since Jan. 10.
Since January 11, the pound has lost ground to its lowest point since January 11, dropping 0.05% to $1.3586.
Many analysts predict the dollar will go up as Fed tightening gets underway, despite recent volatility.
The currency should continue to firm into next week's FOMC, according to strategists at Westpac, who said they wouldn't be surprised if the dollar index is above its 2021 high of 96.938.
They wrote that a lot of the dollar is priced now, but a straight comparison of the dollar index and yield spreads shows that the USD has not fully priced in this story.