Yen hits 6-week high amid growing BOJ rate hike bets

By Kevin Buckland

TOKYO (Reuters) -The yen jumped as much as 1.2% against the U.S. dollar to a six-week high on Friday, after faster-than-expected inflation in Tokyo supported bets for a Bank of Japan interest rate hike next month.

The dollar sagged against most major peers in trading thinned by the U.S. Thanksgiving holiday, with sterling, New Zealand's kiwi and the Chinese yuan all rising to the strongest levels in more than a week.

"The yen is turning into the latest momentum trade ... with little friction to prevent it rising in thin holiday trade," said Matt Simpson, senior market analyst at City Index.

However, for the current session, "unless we find an actual catalyst then we may be nearing the day's low" for USD/JPY, he said.

The dollar drooped 1% to 150.01 yen as of 0506 GMT, and earlier reached 149.77 yen for the first time since Oct. 21.

The dollar index, which measures the greenback versus the yen, sterling, euro, and three other rivals, was 0.2% weaker at 105.86, and touched 105.79 for the first time since Nov. 13.

The dollar has been in the doldrums since its surge to a two-year high against a basket of key rivals a week ago, but remains on track for a more than 2% gain in November, following its more than 3% leap last month.

A lot of that strength has been fuelled by Donald Trump's resounding election victory on Nov. 5, pumping up expectations of big fiscal spending, higher tariffs and tighter borders, all seen by economists as inflationary.

This week, the dollar index is on track for a 1.5% drop, its biggest for a week since mid-August.

The yen made a notable comeback, set for gains of about 3%, which would be its best week since late July.

Sliding U.S. Treasury bond yields have exacerbated the dollar's declines, while Japan's currency has been boosted by safe-haven flows amid Trump's broad tariff warnings to Mexico, Canada and China this week, and by growing bets that the BOJ will raise rates again on Dec. 19.

Traders currently lay about 57% odds for a quarter-point increase, and just over half of economists in a Reuters poll predicted the same.

Potentially adding to the case for a hike, Tokyo's core consumer price index (CPI), which excludes volatile fresh food costs, rose 2.2% in November from a year earlier. That exceeded a median market forecast for a 2.1% gain and accelerated from a 1.8% increase in October.

However, Mizuho Securities strategist Shoki Omori expects the BOJ to keep policy settings steady next month.

"Markets are overreacting to Tokyo CPI results," he said.

"Looks like algos kicked in and took this 'headline opportunity' to short dollar-yen," Omori said, referring to computer-driven trading.

Looking at the details of the CPI print though, "there wasn't much of a difference in terms of demand-pull inflation items" closely watched by the central bank for signs of whether price rises are sustainable, Omori said.

Sterling rose 0.18% to $1.27105, after earlier touching $1.27165, its strongest since Nov. 14.

The euro added 0.14% to $1.0570, nudging back towards Wednesday's one-week peak of $1.058775.

A reading of euro-area inflation is due later in the day that could give hints on the pace of European Central Bank rate cuts, while France's budget wrangling may continue to drag on the shared currency.

ECB policymaker Francois Villeroy de Galhau said on Thursday that the central bank should keep its options open for a bigger rate cut next month, countering hawkish comments from peer Isabel Schnabel the previous day.

The euro has tumbled about 2.8% in November, putting it on course for its worst month since May of last year.

The Chinese yuan gained as much as 0.26% in offshore trading to reach the highest since Nov. 19 at 7.231 per dollar.

The kiwi rose as much as 0.45% to reach the strongest since Nov. 20 at $0.5915.

Bitcoin climbed about 1.4% to $96,498, trying to claw its way back to the record high of $99,830 from a week ago.

This month, the leading cryptocurrency is set to book a 38% jump - its best performance since February - on bets for a more favourable regulatory environment under Trump.

(Reporting by Kevin Buckland; Editing by Jacqueline Wong and Muralikumar Anantharaman)