Yen gains momentum vs. US dollar despite weaker-than-expected Japanese GDP data

SINGAPORE - The yen gained momentum against the dollar, largely shrugging off weaker-than-expected Japanese GDP data as traders reined in expectations the Federal Reserve could raise interest rates this year.

The yen JPY= was 0.2% stronger against the U.S. dollar at 159.075 yen, on track for a second straight day of modest gains but still firmly within its trading range of the past week, after data on Monday showed Japanese GDP for the second quarter expanded at an annualised 1.1%.

Japan's 10-year government bond yield jumped to a three-decade high.

"The details were a mixed bag," Capital Economics analysts wrote in a research note. "GDP expanded at a decent pace in Q2 and with the government still limiting the pass-through from higher energy prices," they wrote, while a jump in government consumption "suggests that Takaichi’s expansionary fiscal policies are starting to have an impact."

The euro EUR= was up 0.1% at $1.1585, breaching a two-month high, while the British pound GBP= was 0.1% stronger at $1.3551, approaching its firmest levels since May. The Australian dollar AUD= was 0.3% higher at $0.7101, while its kiwi counterpart NZD= advanced 0.4% to $0.5911, both at their strongest levels since June.

Soggy U.S. data, including non-farm payrolls and gauges of price inflation for consumers and producers, have doused investor expectations of rate hikes from the Fed this year, with few clues expected from the U.S. central bank until the Jackson Hole symposium from August 27 to 29.

"Softer U.S. data over recent weeks has reduced rate hike expectations, with less than one full hike now priced for December," BNY analysts wrote. "The back end of the Treasury curve remains elevated, with some commentators attributing higher yields to credibility concerns."

Fed funds futures are pricing an implied 69.9% probability that Fed policymakers will hold interest rates at their next two-day meeting ending on September 16, up from a 47.6% chance a month ago, according to the CME Group's FedWatch tool.

The U.S. dollar index =USD, which measures the greenback's strength against a basket of six currencies, was 0.1% lower, trading near its lowest levels of the month at 99.501.

Oil prices fluctuated between gains and losses, while U.S.-Iran talks to resolve the Middle East conflict remain stalled. Brent crude LCOc1 was level at $88.51 a barrel as President Donald Trump told Americans to prepare for continued high fuel prices as a result of the war, while Iran called on the U.S. to accept defeat. Shipping traffic through the Strait of Hormuz remains at a trickle.

Against the Chinese yuan CNH=, the U.S. dollar was flat at 6.7412 yuan in offshore trade ahead of activity data due for release later on Monday.

In cryptocurrencies, bitcoin BTC= was up 0.8% at $63,512.66, while ether ETH= gained 1.1% to $1,902.13.

-Reporting by Gregor Stuart Hunter; Editing by Stephen Coates and Kate Mayberry/Reuters