By Anirban Nag
LONDON (Reuters) - The dollar reached a two-month high against a basket of currencies and a one-month high against the yen on Monday, after Federal Reserve Chair Janet Yellen fanned expectations the Fed would raise U.S. interest rates soon.
Political developments in Tokyo were also supporting the dollar against the yen. Japanese Prime Minister Shinzo Abe said he would delay a sales tax increase scheduled for next April by two and a half years, a senior ruling party official said on Monday.
Japan is also expected to compile a supplementary budget to stimulate the sputtering economy, a move which is widely expected to be followed by further monetary easing by the Bank of Japan, all of which undercut the yen.
Volumes dwindled in Europe with both London and U.S. markets closed for public holidays.
The dollar rose above 111.00 yen for the first time since late April, reaching 111.455 yen in European trading, up 1 percent on the day. For the month, the dollar is on track for its best showing since late 2014 against the yen
Against a basket of currencies, the dollar was up 0.2 percent at 95.695 (DXY), while the euro recovered on slightly better than expected German inflation. The single currency had hit a 2 1/2-month low of $1.1097
Yellen said on Friday a rate increase in the coming months "would be appropriate," if the economy and labour market continued to improve.
"Yellen's comments have raised the chances for a June or July rate hike, supporting the dollar," said Niels Christensen, FX strategist at Nordea, a large Nordic bank. "A lot, though, will depend on the data that comes out this week. A good set of numbers will no doubt add to dollar strength."
This week, U.S. non-farm payrolls and the Institute for Supply Management manufacturing survey are due. A solid employment report for May, due out on Friday, could heighten expectations for a June move and boost the dollar.
"The dollar index can still move towards around 96.20 before sellers get tempted," said Jameel Ahmad, chief market analyst at FXTM.
As recently as early May, a Fed rate increase in June was off the agenda. But after a string of good data and the Fed officials' comments, the likelihood of a hike based on CME's Fedwatch has reached 28 percent.
Meanwhile, prospects for a delay in raising Japan's sales tax has boosted Japanese stocks and dimmed the appeal of the safe-haven yen, traders said.
A delay in raising the sales tax could shield the floundering economy, but it means less income for the cash-strapped government. That might lead rating agencies to downgrade Japan's sovereign rating.