Currency markets swung back to trading on the diverging outlooks for growth and tighter monetary policy on Tuesday, lifting the dollar and euro against the yen.
Emmanuel Macron's election on Sunday put a cap on immediate political concerns, pushing US and European yields higher. The interest rate premium investors get for holding dollar 10-year government bonds instead of their yen equivalents rose to its highest since the end of March overnight.
“We are going back to trading diverging monetary policy," said Athanasios Vamvakadis, head of G10 currency strategy at Bank of America Merrill Lynch in London.
“The market has priced in a 75 to 80 per cent chance of a U.S. rate hike in June. At the same time the market expects that the (European Central Bank) will start tapering later this year. So both the euro and dollar should do well against the yen.”
The dollar and the euro gained around a third of a per cent to 113.67 yen and 124.125 yen, respectively.
The Swiss franc, another currency with firmly negative interest rates as well as a central bank actively seeking to weaken it with market intervention, fell to its lowest against the euro since mid-October.
The euro was flat against the dollar at $1.0922, around a cent below highs hit after Macron's victory over anti-euro nationalist Marine Le Pen on Sunday prompted a relief rally in the single currency.
“I think it is going to regain momentum over time,” said Yukio Ishizuki, senior currency analyst at Daiwa Securities.
While US officials are already raising interest rates steadily, investors are debating when and how the ECB could scale back its emergency programme of quantitative easing given improvement in the euro zone economy.
The currency bloc's GDP growth in the first quarter, due next week, is expected to have outpaced anaemic 0.7 per cent growth in the United States in the same period. Inflation jumped back to 1.9 per cent in April.
ECB board member Yves Mersch had said on Monday that the central bank is close to replacing its negative view with a neutral one on whether the euro zone economy will reach growth targets, and should adjust its policy guidance accordingly.
ECB chief Mario Draghi is due to speak to the Dutch parliament on Wednesday.
“I think Mersch gave us a big hint yesterday. Draghi has been dovish so far but if he changes his tone, then we could see a change of tide,” said Kyosuke Suzuki, director of forex at Societe Generale.