Dollar holds firm against yen, major peers on strong U.S. inflation

By Daniel Leussink

TOKYO (Reuters) - The dollar steadied near a six-month high against the Japanese yen and held firm against its major peers on Thursday after the latest U.S. economic data reaffirmed expectations that the Federal Reserve will hike interest rates two more times this year.

While financial markets remained vexed by risks of a full-scale Sino-U.S. trade war, investors' focus was drawn to the U.S. Labour Department's expectation-beating inflation report which boosted confidence in the world's top economy.

The dollar edged up 0.1 percent, trading at 112.07 yen after breaking through the 112-barrier for the first time since Jan. 10 in U.S. trade. The dollar had gained as much as 1.3 percent on Wednesday to 112.175 yen.

The dollar's index against a basket of six major currencies held firm near a one-week high of 94.769 reached overnight, trading at 94.725.

"The market is reacting to what is known," said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.

"The world economy is in a decent state and the U.S. economy is extremely strong, which means interest rates will continue to be raised. Investors are focussing on signs of the strength of the U.S. economy," she said.

U.S. producer prices rose in June, with gains in the cost of services and motor vehicles, leading to the biggest annual increase in 6-1/2 years.

As the dollar held firm, the euro lacked momentum, trading at $1.1675, edging further off a 3-1/2-week high off $1.17905 touched on Monday.

On Wednesday, nervousness in broader currency markets over an escalation in the U.S.-China trade war was slightly more contained than in equity markets, where there were hefty falls globally after Washington threatened 10 percent tariffs on $200 billion worth of Chinese imports.

"If the U.S. levies tariffs on $200 billion worth of Chinese imports, China can't levy tariffs on a similar amount, but it is likely there will be some kind of sanctions," said Kazushige Kaida, head of foreign exchange at State Street Bank.

"If that continues to escalate, not only the U.S. will be hit on a macro-economic level, but China's macro-economy, and countries with macro-economic ties to China, will be impacted as well."

The Canadian dollar weakened against the dollar as broad-based gains for the greenback offset an interest rate hike and the prospect of further tightening by the Bank of Canada.

The Canadian dollar was nearly flat in Asia on Thursday at C$1.3215 per U.S. unit, after having fallen about 0.75 percent the previous day.

(Editing by Shri Navaratnam)