LONDON/SINGAPORE (Reuters) - The US dollar rallied against Japan's yen on Monday after a report said the Bank of Japan saw little need to end negative interest rates in December, contrary to some investors' expectations.
Meanwhile, China's yuan fell to a three-week low after data showed deflation in the country worsened in November.
The greenback rose as high as 146.46 yen and last bought 146.08 yen, up 0.78%. That reversed some of the steep falls against the Japanese currency late last week when bets grew that the Bank of Japan may end negative interest rates as soon as next week.
Bloomberg reported on Monday that BOJ officials have yet to see enough evidence that wage growth is strong enough to justify ending its ultra-loose monetary policy this month, citing people familiar with the matter.
The dollar's rise against the yen helped push the dollar index, which tracks the currency against six peers, up 0.15% to 104.12.
"This isn't surprising," said Simon Harvey, head of FX analysis at Monex Europe. "It just goes to show there isn’t a free lunch when it comes to speculating on the Bank of Japan."
"We think that January poses a more opportune moment rather than December. Next week's meeting is going to come in thinner liquidity positions, there isn’t as much space to follow up in terms of navigating markets through the change in conditions."
The euro was last flat at $1.0761, not too far from Friday's more than three-week low of $1.0724, while sterling was also little changed at $1.2551.
Investors' focus this week will be on US inflation figures for November, due on Tuesday, and the Federal Reserve's interest rate decision on Wednesday. The European Central Bank and the Bank of England set rates on Thursday.
Economists think US inflation likely slowed to 3.1% in November year-on-year, from 3.2% in October. And they expect the Fed to hold interest rates at the current 5.25% to 5.5% level for a third meeting in a row.
Data on Friday showed US job growth accelerated in November while the unemployment rate fell to 3.7%, underscoring resilience in the labour market in the world's largest economy and challenging expectations of imminent rate cuts from the Fed beginning early next year.
The data caused traders to push back expectations of how soon the Fed could begin cutting rates, with many now leaning toward May instead of March.
Data over the weekend showed China's consumer prices fell at the fastest pace in three years in November while factory-gate deflation deepened, indicating increasing deflationary pressure as weak domestic demand casts doubt over the country's economic recovery.
The yuan weakened to a three-week low in both the onshore and offshore markets on Monday, with the former last at 7.1791 per dollar. The Australian dollar, often used as a liquid proxy for the yuan, fell 0.34% to $0.6555.
"The lack of a strong revival in the economy suggests that weak inflation will persist, and more policy support is indeed required," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.