* U.S. dollar hits highest in more than five weeks
* Japan's yen falls versus dollar, euro
LONDON, Sept 28 (Reuters) - The U.S. dollar rose to its
highest in more than five weeks and the Japanese yen dropped
versus both dollar and euro, as rising U.S. and European
government bond yields made their currencies more attractive to
U.S. Treasury yields have surged since the end of last week,
after the Federal Reserve said it will likely begin reducing its
monthly bond purchases as soon as November and hinted that
interest rate hikes may follow more.
The Japanese yen is the G10 currency most correlated with
U.S. two-year and 10-year Treasury yields, MUFG currency analyst
Lee Hardman said in a note to clients.
"Upward pressure on US yields should continue to provide a
lift for USD/JPY in the near-term," he said, although he also
said that the yen is "deeply undervalued" which could limit the
extent of the weakness.
At 0722 GMT, the U.S. dollar index was up 0.2% at 93.592,
having earlier hit 93.616, its highest since August 20.
The euro was down 0.2% versus the dollar at $1.16775
"Amidst the many cross-currents in FX markets right now -
energy, Evergrande, US debt ceiling, Delta - one theme that
seems to be gaining traction is that the market lies on the cusp
of re-assessing the path for the Fed tightening cycle," ING
strategists wrote in a note to clients.
"A big move higher in the short-end is the key reason why we
are bullish on the dollar, particularly from 2Q next year, but
we will closely monitor and re-assess whether that move needs to
come earlier - largely a function of timing the take-off in
The yen - which is seen as a safe haven currency - was down
around 0.3% against the dollar, with the pair changing hands at
111.355. Earlier in the session it hit 111.430, the yen's
weakest in almost three months.
ING strategists said the yen's weakness was also due to
Japan's role as a large energy importer. Oil prices climbed for
a sixth day on Tuesday and prices of liquefied natural gas (LNG)
and coal also rose.
Minutes from the Bank of Japan's July meeting showed that
some central bank policymakers warned of the risk of a delay in
the country's economic recovery.
The Australian dollar, which is seen as a liquid proxy for
risk appetite, was down 0.2% at $0.7267.
The British pound was down 0.2% at $1.36785. The currency
jumped last week after a hawkish tone by the Bank of England,
but analysts struck a cautious note on the currency as Britain
struggled with supply chain chaos.
"The longer the supply bottlenecks persist, the more
endangered the economic recovery will be and the less likely a
significant tightening of monetary policy will become,"
Commerzbank FX analyst Esther Reichelt said in a client note.
Currency traders are waiting for central bank speakers,
including ECB Christine Lagarde at 1200 GMT and U.S. Federal
Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen,
who will appear before U.S. lawmakers later in the session.
Market participants are also watching U.S. politics, after
the Senate failed to advance a measure to suspend the federal
debt ceiling and avoid a partial government shutdown.
China's central bank said it would protect consumers exposed
to the housing market on Monday and injected more cash into the
banking system as the Shenzhen government began investigating
the wealth management unit of ailing developer Evergrande.
(Reporting by Elizabeth Howcroft; editing by Philippa Fletcher)