By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) -The U.S. dollar surged to a fresh 38-year peak against the yen on Monday, as Treasury yields on the long end rose sharply, keeping investors on heightened alert for intervention from Japanese authorities to bolster the country's currency.
The yen's weakness was exacerbated by data showing Japan's economy shrank more than initially reported in the first quarter.
The euro, on the other hand, climbed on Monday after a convincing and historic win by the French far right in the first round of parliamentary elections fell slightly short of some expectations, leaving the final result dependent on party deals before a second round next weekend.
In afternoon trading, the dollar soared to 161.72 yen, its strongest level since 1986. It was last up 0.4% at 161.48 yen. The yen has fallen more than 12% this year.
"We're close to what would be defined as a one-way market, gains in 12 of the last 15 days, and five of the last six weeks," said Marc Chandler, chief market strategist, at Bannockburn Global Forex in New York.
"People know that they are on thin ice on intervention. But they know that the weakness of the yen is related to the rise in Treasury yields and the slowness of Japan to raise rates. So even if Japan intervenes, the market will view intervention as an opportunity to buy dollars."
Data showing weaker-than-expected economic growth added to the uncertainty about the Bank of Japan's next move in interest rates.
The BoJ meets in late July and has hinted that it could raise borrowing costs, potentially helping close the yawning gap between Japanese and U.S. rates that has hammered the yen this year by causing investors to flock to the higher returns on U.S. bonds.
Separate data on Monday showed the business mood in Japan's service-sector soured in June, offsetting a big lift in factory confidence.
The yen's fall pushed the euro to a 32-year high of 173.68 yen.
The euro was also higher against the dollar, up 0.2% at $1.0736.
EASING EURO RISKS?
Marine Le Pen's far-right National Rally (RN) party won the first round of France's parliamentary elections on Sunday by a large margin, exit polls showed, although analysts noted it won a smaller share of the vote than some polls had initially projected, triggering a rally in stocks and bonds.
The euro has lost around 1.3% since the French far right triumphed in European parliamentary elections in early June, prompting President Emmanuel Macron to call a snap domestic election.
"It's an alleviation of risks. We're seeing a lot of hedges going into the French election getting unwound," said Simon Harvey, head of FX analysis, at Monex Europe in London.
Investors have been concerned that the RN could come to power through "cohabitation" with Macron and push a high-spending and euro-sceptic agenda.
The rise in the euro briefly sent the dollar a touch lower against a basket of currencies, though the greenback was on the back foot after data on Friday showed U.S. inflation cooled in May, cementing expectations the Federal Reserve will begin cutting interest rates later this year.
The dollar index was last up 0.1% at 105.84.
Against the dollar, sterling was flat at $1.2643, while the Aussie was down 0.2% at US$0.6654.
The dollar briefly slipped after data showing a U.S. manufacturing index fell to 48.5 in June, lower than the forecast of 49.1.
U.S. construction spending for May also came in weaker than expected, falling 0.1%, compared with expectations for a 0.2% rise.
Market pricing now points to about a 63% chance of a Fed cut in September, as compared to a 55% chance a month ago, according to the CME FedWatch tool.
Currency
bid
prices at
1 July
07:45
p.m. GMT
Descripti RIC Last U.S. Pct YTD Pct High Low
on Close Change Bid Bid
Previous
Session
Dollar 105.82 105.72 0.11% 4.39% 105.98 105.
index 42
Euro/Doll 1.0737 1.0713 0.22% -2.73% $1.0776 $1.0
ar 718
Dollar/Ye 161.47 160.88 0.38% 14.49% 161.72 160.
n 82
Euro/Yen 1.0737 172.36 0.59% 11.4% 173.67 172.
61
Dollar/Sw 0.9033 0.8988 0.51% 7.34% 0.9045 0.89
iss 84
Sterling/ 1.2642 1.2646 -0.02% -0.65% $1.271 $1.0
Dollar 718
Dollar/Ca 1.3737 1.368 0.43% 3.64% 1.3748 1.36
nadian 6
Aussie/Do 0.6653 0.667 -0.24% -2.41% $0.6689 $0.6
llar 645
Euro/Swis 0.9699 0.9624 0.78% 4.45% 0.971 0.96
s 46
Euro/Ster 0.849 0.8471 0.22% -2.05% 0.8498 0.84
ling 75
NZ 0.6073 0.6091 -0.27% -3.88% $0.611 0.60
Dollar/Do 66
llar
Dollar/No 10.6596 10.6642 -0.04% 5.18% 10.6854 10.6
rway 024
Euro/Norw 11.4416 11.4312 0.09% 1.94% 11.4668 11.4
ay 119
Dollar/Sw 10.6208 10.5908 0.28% 5.5% 10.643 10.5
eden 41
Euro/Swed 11.4029 11.3525 0.44% 2.49% 11.4176 11.3
en 436
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Harry Robertson in London and Rae Wee in Singapore; Editing by Stephen Coates, Jason Neely, David Evans and Andrea Ricci)