The dollar climbed to a four-month peak against the yen on Thursday, bolstered by the rise in U.S. Treasury yields that suggests a more upbeat outlook for the world's largest economy. U.S. benchmark 10-year yields hit a high of 3.122 percent, the highest in nearly seven years.
"The upside pressure on the dollar has been dramatic as the dollar has not declined consistently in a period which should be seeing dollar weakness," John Taylor, president and founder of research firm Taylor Global Vision in New York, said.
Rising yields reflect continued optimism about the U.S. economy, reinforcing expectations that the Federal Reserve would raise borrowing rates at least two more times this year.
The dollar rose to its strongest versus the Japanese since Jan. 23 at 110.80 yen. It was last at 110.76, up 0.34 percent on the day. The dollar index rose 0.11 percent to 93.49, below its 2018 high of 93.632.
The euro, meanwhile, fell to near a five-month low against the dollar on Thursday on concerns about the demands of populist parties likely to form Italy's next government.
Italy's anti-establishment 5-Star Movement and the anti-immigrant League, which are working to draft a coalition program, may ask the European Central Bank to forgive 250 billion euros of debt. But broader Italian markets held up better on Thursday as investors played down the broader impact on euro zone political stability and questioned whether the Italian parties would really follow through on such plans.
The euro slipped to $1.1792, just above the $1.1763 2018 low it hit on Wednesday. The euro has slumped six cents from more than $1.24 in three weeks after a huge dollar rally.
Investors are betting U.S. interest rates will need to rise further, while other central banks are postponing monetary tightening. That has forced investors who took big positions against the dollar anticipating a fall in 2018 to unwind and cover their positions, pushing the greenback even higher.
"This sense of a market that is not particularly well prepared for a euro decline is supported by the benign valuations still evident in the pricing of six-month and 12-month implied volatility," BNY Mellon analysts said in a note, referring to prices of a measure of expected swings in the value of the euro.
Sterling gave up earlier gains after the UK government dismissed a media report that Britain wanted to stay in the European Union's customs union after Brexit.
