By Saikat Chatterjee
LONDON (Reuters) - The dollar jumped against the yen on Tuesday, nearing a two-week high as the Japanese currency was pressured by a political scandal engulfing Prime Minister Shinzo Abe's govermment.
The yen weakened by 0.3 to 0.5 percent against other major currencies after Japan's ministry of finance said on Monday it altered documents related to a discounted sale of state-owned land to a school operator with ties to Abe's wife.
The dollar is also benefiting from the decline in broader currency market volatility which is encouraging investors to add positions in higher-yielding currencies, though the greenback's gains were capped before monthly U.S. inflation data.
"The broader story remains that of U.S. monetary policy normalization in the backdrop of an improving economy and a further decline in currency market volatility would only fuel more risk taking appetite," said Commerzbank's FX strategist Thu Lan Nguyen.
The dollar was trading at 106.95 against the yen
The yen tends to suffer in an environment when riskier and higher-yielding assets are bid but Morgan Stanley (NYSE:MS) strategists said in a note that a further deterioration in the political situation that affected the position of Abe, could see the yen "forcefully return towards its previous upward trend."
Elsewhere, though the renewed drop in currency volatility prompted investors to add bets on higher-yield currencies with the Australian dollar
The euro (EUR=EBS) was broadly flat around $1.2329 against the dollar on the day.
A key focus for investors is the U.S. CPI data due at 1230 GMT. Median forecasts by economists polled by Reuters point to annual core CPI inflation
A higher reading could stoke expectations that the Federal Reserve will likely raise interest rates four times, rather than three times, this year.
A rate hike at its upcoming policy meeting on March 20-21 has been long considered a done deal while another increase in June is almost fully priced in.
Yet traders are also mindful that the prospects of more U.S. rate hikes, while theoretically positive for the dollar, may not necessarily lift the U.S. currency, given other factors weighing on the greenback.
One big issue is U.S. President Donald Trump's tariff on steel and aluminium, which many investors worry could trigger retaliatory moves by U.S. trade partners and hurt the economy.